If litecoin is the silver to bitcoin's gold, then it's reasonably priced

[Peter R]

I often hear people use the analogy of gold and silver when describing the economic role envisioned for an alt-coin such as litecoin.  I decided to use this analogy to calculate a fair price for litecoin assuming this was true.  

World gold and silver reserves are estimated at 171,000 tonnes and 530,000 tonnes, respectively.  The current market price for gold is $43,000 per kg, and $670 per kg for silver.  This gives "market caps" of:

   GOLD:  (171 x 10^6 kg)  x ($43,000 / kg) = $7.4 trillion

   SILVER: (530 x 10^6 kg) x ($670 / kg) = $355 billion

The ratio of the dollar value of the world's gold supply to the world's silver supply is:

   GOLD/SILVER RATIO: ($7.4 x 10^12) / ($355 x 10^9) = 20.8.  

According to these estimates and calculations, the world's gold supply is 20.8 times more valuable than the world's silver supply.

According to http://coinmarketcap.com, the "market caps" of bitcoin and litecoin are:

   BITCOIN: $8 billion

   LITECOIN: $0.43 billion

With a ratio of:

   BITCOIN/LITECOIN RATIO: ($8 x 10^9) / ($0.43 x 10^9) = 18.6.

The world's bitcoin supply is 18.6 times more valuable than the world's litecoin supply.  This suggests that litecoin is only slightly overpriced, assuming the analogy to the economic roles between gold and silver hold.  

The fair price for litecoin, according to the "litecoin is the silver to bitcoin's gold" talking point is:

   CURRENT LTC PRICE: 0.025 BTC

   OVERVALUATION BASED ON GOLD/SILVER RATIO: 20.8/18.6 = 1.1

   FAIR LTC PRICE: 0.025 BTC / 1.1 = 0.023 BTC


I am not suggesting that I think Litecoin is actually fairly valued, but I thought this was an interesting calculation.  

[Lethn]

What I find particularly interesting is that even though there was a massive panic dump everywhere after MTGOX Litecoin has done incredibly well through all this and hardly anyone seems to have mentioned it, they're all too focused on the panic. For those who haven't looked lately the BTC/LTC price got completely dumped but just as quickly it rebounded and hasn't suffered the same hit to it's value as other altcoins have which has impressed me a bit really.

[tyz]

...For those who haven't looked lately the BTC/LTC price got completely dumped but just as quickly it rebounded and hasn't suffered the same hit to it's value as other altcoins have which has impressed me a bit really.

Interesting fact. Didn't realize that. So, litecoin showed up a relative strength.

[LiteCoinGuy]

Litecoin has his place and will stay. like there is VISA and Mastercard, there is BTC and LTC. its the second best crypto out there.

[Omega0255]

Litecoin has his place and will stay. like there is VISA and Mastercard, there is BTC and LTC. its the second best crypto out there.

  Which one's the big one's big BTC? Visa? Litecoin is supposed to have 4x as many coins as Bitcoin so that would suggest that it should have 1/4 the price of Bitcoin? Clearly that isn't the case as Litecoin doesn't have a pricetag of $125+ Does this mean the coin is undervalued or just it really doesn't add up like that.

[ThirdRenaissance]

Litecoin is supposed to have 4x as many coins as Bitcoin so that would suggest that it should have 1/4 the price of Bitcoin?

That's a claim often purported by Litecoin supporters and it has zero value. Litecoin having 4x the number of coins means exactly nothing. It's not the "silver to Bitcoin's gold", in fact it has no relation to Bitcoin besides being yet another altcoin. There is no reason to assume any price correlations beyond the movement of the cryptocurrency space as a whole.

[aminorex]

Litecoin is supposed to have 4x as many coins as Bitcoin so that would suggest that it should have 1/4 the price of Bitcoin?

That's a claim often purported by Litecoin supporters and it has zero value. Litecoin having 4x the number of coins means exactly nothing. It's not the "silver to Bitcoin's gold", in fact it has no relation to Bitcoin besides being yet another altcoin. There is no reason to assume any price correlations beyond the movement of the cryptocurrency space as a whole.

That's got to be the weakest statement all day.  The whole crypto space is intensely correlated with bitcoin.  Litecoin is massively correlated with bitcoin.  Is there any reason to assume it?  Just the whole of price history.  Clearly there are reasons why they are correlated.  We just haven't described them yet.  I expect they boil down to the fact that the primary use of alts is mining the crap out of them to get more bitcoin.

That said, I totally agree that the 1:4 argument is completely bogus.  The inflation rate in LTC is much higher for one thing, which makes it much less desirable to hold, less of a saving vehicle.  As a spending vehicle, well, you'll be hard pressed to find any use cases in which bitcoin is not superior, as acceptance is higher, liquidity is better, and software is better.  Not to mention being much more secure.  That's probably never going to change, so there just isn't much excuse for LTC, except to do beta arb, and milk your GPUs.

The OPs analysis is nonetheless an intriguing coincidence, suggestive of some interesting dynamic.

[byronbb]

26M LTC in existence.
12M BTC in existence.

LTC rate to grow at a rate 4x bitcoin. extrapolate.gif

[RhoDelta]

Current btc/ltc value ratio is about 39:1. Gold vs. silver is around 64:1 right now.
Estimates I've seen would be 5x silver extracted from the ground vs. gold. Similar to the 4x in LTC/BTC.

Based on those numbers Litecoin appears fairly valued assuming a similar gold/silver relation.
Silver does appear undervalued currently based on historic ratios (In the ballpark of 40-50:1) assuming a mean reversion occurs.

[BitOnyx]

Value of coin is not related to supply, not in the way money or normal products are.

Biggest problem is meta currencies are something different. Compartment to Visa and MasterCard make no sense. It is like comparing cola to liquid gold.

[Peter R]

The analysis I did in the original post showed that litecoin was fairly valued with respect to bitcoin at 0.023 BTC if we assume that "litecoin is the silver to bitcoin's gold."  The next question is how accurate is that assumption?

I would argue that it's not accurate.

There are many ways I can imagine litcoin having less of an economic roll than silver (WRT gold), and few ways I can imagine it having more.  Yet the current price of litecoin is fair only if litecoin achieves some imagined economic roll that it has yet to achieve.  Why purchase litecoin at 0.025 BTC hoping that it will become the "silver to bitcoin's gold" if the expected price should it attain that economic roll is only 0.023 BTC?

Why did society evolve to have two monetary metals (gold and silver)?  Why not just one?  I would argue that the fundamental reason for the monetization of silver was that it solved gold's divisibility problem.  A 1 oz gold coin was the equivalent to a month's wages for many people.  It simply wasn't practical to shave off a small amount of gold to pay for a loaf of bread that represented 15 min of work.  

With bitcoin there is no divisibility problem (and soon there will be no practical limit to bitcoin transactions per second).  Bitcoin is very close to the ideal form of money all by itself.      


That being said, I do believe I understand the true economic roll that alt coins like litecoin will play as the cryptocurrency economy grows.  But that's a topic for a different post.  

[safetyfirst]

That being said, I do believe I understand the true economic roll that alt coins like litecoin will play as the cryptocurrency economy grows.  But that's a topic for a different post.  

Which is? Curious! Share your insights!

[leopard2]

fair ratio is 1:4 (while gold:silver is 1:13 or so)

thus silver is under valued by a factor of 4, and LTC by a factor of 10

[LiteCoinGuy]

good thing is also: LTC is now live on the biggest chinese exchanges. so here we go 

[justbtcme]

Can someone explain to me why there is a need for litecoin? Why not dogecoin or any other virtual coins?

[verdun2003]

If you take the silver under the crust of the earth, the ratio goes down to 10! Even at the time of the egyptians, silver was more valued as more scarce than gold - so it all depends on supply and demand, let alone human intervention with the gold/silver ratio more than a century ago.

[safetyfirst]

good thing is also: LTC is now live on the biggest chinese exchanges. so here we go 

now already? I thought they go for the 19th? is this why the price drops?

[El Dude]

Can someone explain to me why there is a need for litecoin? Why not dogecoin or any other virtual coins?

lol dogecoin a litecoin clone with billion of coins and no hardcap , Dogecoin will die.

It's important to have 2 coins who's dev team work together and that is btc and ltc.

[skilo]

Litecoin is a good crypto but Bitcoin is already here so why use it?

Bitcoin is used more like a stock for speculation and as a western union replacement to quickly beam money across the world in seconds with virtually no fees, It's use as a medium of exchange is sort of like a stock.

Trying to use Bitcoin as a medium of exchange would be like trying to buy groceries with stock certificates, Yes they are valuable. And yes some people may even accept them in exchange for goods but not everyone will and all the while the certificates are jumping up and down in value during the transaction.

Maybe if Bitcoin became stable then it could be used as a medium of exchange but stability would kill speculation which would kill the market which in turn would kill Bitcoin.

[GigaCoin]

Can someone explain to me why there is a need for litecoin? Why not dogecoin or any other virtual coins?

why is there a need for dogecoin then ?