Litecoin is the Silver to Bitcoin's Gold: Is LTC & BTC comparable to Precious Metals?

Recently I was perusing Twitter looking for charting ideas and seeking recent news. I came across a couple of posts by Master @MASTERBTCLTC (let's be honest, it was more than a "couple" of posts) who always tweets great Litecoin content. In a couple of posts were these new graphics using Venn diagrams (see below)

It's showing 4 coins Bitcoin, Litecoin, Dogecoin and Tether as they relate to the properties of Money, Gold, and Digital. Although I found an error, (Dogecoin is Digital but not in the Digital circle) it still got me to thinking of Litecoin's old slogan; "Litecoin is the Silver to Bitcoin's gold".

The Digital Gold Debate

See, a few years ago, Bitcoin was being called "Digital Gold" to goldbug, Peter Schiff's chagrin, and causing all kinds of drama between Bitcoiners and Goldbugs. (There's always drama on Twitter isn't there?) As a result, Charlie Lee started marketing Litecoin as "Digital Silver". The debate is still ongoing, by the way, as the Cryptocurrency market seems more correlated to equities than it is to precious metals or commodities. But how do these 3 coins in the Gold circle stack up against the claims of being like precious metals? And why is Tether not invited to the party? Let's get into it.

The Intrinsic Value Argument

According to Investopedia, Intrinsic value is "A measure of what an asset is worth". Goldbugs have long pointed out that Gold has intrinsic value and Bitcoin doesn't. Well, anything traded in a financial market is an asset that has worth. (Financial markets' job is to determine an asset's worth) Then how do markets' determine an asset's worth or price. Anyone who has ever taken an Economic's 101 course knows that price is determined by supply and demand. If supply (or quantity) increases, price goes down, if demand increases, price goes up.

Precious Metals Supply/Demand

Here's where it gets interesting. Supply is created through "mining" for precious metals and cryptocurrencies. Whenever a block is created, more of the coin is created called block rewards, just like when a precious metal is mined and minted into coins. These newly created coins (either crypto or PM) are then added to the supply, also called "supply inflation". If demand is greater than the supply inflation, then the coin goes up in price. If the demand is less than supply inflation, then the coin goes down in price. An example is Silver's price inflation in 2020 was about negative 4%. Yes, it was negative meaning supply was reduced. This tells me that in 2020 the demand for silver was greater than the supply inflation, suggesting price should go up.

The chart of silver price for 2020 confirms supply and demand! This is an interesting part, when the price of gold or silver goes up, miners will respond by increasing the supply inflation and also the inverse. So, we would then expect Silver's supply inflation to increase since the silver price has increased right? Well, the supply inflation in 2021 was 8%, yet another confirmation of economic forces. This allows gold and silver to maintain a somewhat stable price. (If you're asking, the price of silver didn't change much in 2021) Excited yet? You are now lightyears ahead of most people in predicting price now! Just by understanding a little economics. To summarize, since miners respond to demand by increasing supply inflation or deflation, price increase is dictated by unexpected demand increase. Price stability occurs with stable demand.

Bitcoin Supply/Demand

Now let's look at cryptocurrencies. If Bitcoin is like Gold then demand/supply economics should be similar right? Well, when price goes up with Bitcoin, miners do tend to respond by increasing mining (hashrate). However, Bitcoin has a difficulty adjustment to maintain the creation of blocks at about 1 every 10 minutes. So when miners work harder, Bitcoin responds by maintaining constant supply inflation. (Remember, block rewards are creating new Bitcoin to add to supply) Therefore, unlike precious metals, BTC/LTC miners cannot respond to increase demand by increasing supply inflation. This feature causes the price change purely by demand except during halving events where supply inflation is reduced by 50% regardless of demand. Price appreciation is literally built into BTC/LTC protocol. Also in terms of scarcity, BTC/LTC are more scarce than precious metals because supply inflation cannot be manipulated (increased or reduced by miners).

A Percentage Game

For over a year now, we have been hearing (and feeling) the effects of uncontrolled inflation or economic inflation. Since the Dollar is used as the currency (money) in the US, economic inflation is closely related to the dollar's supply inflation. Traditionally, precious metals have been used to "hedge" inflation. What does that mean? We instinctually know that inflation means that everything we buy is getting more expensive and we have to work harder to buy anything. In fact, economists state that a little inflation (~4%) is good for the economy for that purpose, to keep productivity up and since things will cost more in the future, you are encouraged to spend instead of saving. Anything that has supply inflation below economic inflation is supposed to gain in value or maintain the ability to buy things in the future instead of less. An asset with low supply inflation encourages savings since its supply inflation is below economic inflation. Therefore, anything with supply inflation below economic inflation is supposed to be a "hedge" against inflation. Gold's supply inflation doesn't change much (regardless of demand). The supply inflation for gold in 2021 was about 2.7%, making Gold a decent hedge against inflation. Earlier I mentioned silver's inflation was -4% and 8% for 2020 and 2021 respectively, so silver is sometimes a hedge like gold other times more comparable to money (~4%+).

BTC/LTC/Doge vs. Gold

To compare Bitcoin, Litecoin, and Doge against Gold's ability to hedge inflation, all we have to do is compare supply inflation. Let the Battle Royale begin! Since the previous paragraph showed gold is consistently a better hedge than Silver, we'll compare BTC/LTC/Doge against gold. Currently, Bitcoin's supply inflation is about 1.8% and will slowly reduce till about March 2024 when supply inflation will be reduced by 50% (halving event). Seems Bitcoin is superior to gold as a hedge against inflation. Now Litecoin's current inflation is about 3.8% making LTC more comparable to "ideal" money (~4%) but sometime around July 2023, LTC's supply inflation will be around 1.8% making LTC a superior hedge versus gold. Seems @MASTERBTCLTC knows what he's talking about putting Litecoin in the gold and money category, kinda like silver. Here's a thought, after July 2023, Litecoin will be superior to gold but not quite as good as Bitcoin (~1.7% in July 2023), granted not by much, more like "Litecoin is Silver to Bitcoin's Gold". Also, Litecoin's blocks come about every 2.5 minutes versus Bitcoin's 10 mins, faster, like money. Seems Charlie Lee knew what he was talking about with that slogan. Right now, because Litecoin's inflation is more stable than silver's inflation, Litecoin is better money than silver, but silver is, unfortunately, no longer used as money. (A sitting President of the United States was assassinated for trying to make silver money again)((Happened twice actually, Lincoln and Kennedy))(((I need to refocus))) Finally, Doge's supply inflation is currently about 3.8% making it inferior to gold but superior as money. Also, Dogecoin's blocks come about every 1 minute, making it faster, like money. Doge no longer has halving events, so its supply inflation is very stable and very slowly reducing over time. Around 2030, Doge's supply inflation will be about the same as gold. We could argue if @MASTERBTCLTC was correct in placing Doge within Gold and Money's circle, currently, it is not but around 2030, it will be. (That's a long time to wait to be correct)

Now is the time to "Look Into Litecoin"

Bitcoin and Litecoin are indeed comparable to precious metals and are even superior to gold when looking at supply. Tether and other stablecoins are digital dollars so comparing them to precious metals is the same as comparing to dollars, thus are not invited to the gold circle party. Although this article ignored the demand side of economics, I don't think many questions the increasing demand for Bitcoin as adoption increases globally. Nor do I think the demand for gold and silver vs Bitcoin could be easily answered as it's a hotly debated topic (with Peter Schiff). We did discuss how Litecoin has positioned itself a Digital Silver until July 2023 where it will literally turn to gold. Outside the scope of this article is the impending implementation of Mimblewimble which makes Litecoin's role as money better. Mimlewimble allows Litecoin to return money to the Silver Standard and then to the Gold Standard. Isn't it time you "Looked Into Litecoin"?

As an added bonus, I leave you with a chart of the US money supply showing the inflation of the Dollar since 1959.

Follow me on Twitter: The Litecoin Eagle @EagleESBD