A crypto-currency primer: Bitcoin vs. Litecoin

A crypto-currency primer: Bitcoin vs. Litecoin

Summary: Bitcoin has been in the news a ton and it's possible to mine it on your Mac. But unless you purchase dedicated mining hardware (which is expensive) Bitcoin mining isn't cost-effective. A better choice is Litecoin.

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TOPICS: Apple, Hardware, Software
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A crypto-currency primer: Bitcoin vs. Litecoin - Jason O'Grady

In my previous post on How to mine Bitcoin on your Mac I discussed how to mine crypto-gold on your Mac. Before diving in, I wanted to lay down a framework on the basics of Bitcoin (BTC) and its easier-to-mine competitor, Litecoin (LTC).

Since investing in dedicated Bitcoin mining hardware (ASICs) I've mostly ignored other competing crypto-currencies until now. Although Bitcoin is the media darling, Litecoin is a better option for the average user wanting to get into crypto-currency mining.

As I mention in my mining post, Bitcoin mining isn't cost effective without expensive, dedicated mining hardware. However Litecoin, the second largest crypto-currency by market cap, is exponentially easier to mine with the Mac that you're reading this on right now. And at around US$30/LTC, it's more affordable to outright purchase too. 

Bitcoin

Before I get into Litecoin a brief history of Bitcoin (BTC) is in order. For background I recommend the original paper (PDF) by Satoshi Nakamoto proposing Bitcoin. 

Bitcoin was revolutionary when it was created. The idea behind "mining" coins as a way to validate transactions and at the same time reward early adopters was brilliant. It quickly strengthened the network and took care of distributing coins to interested parties. Mined coins on the network are distributed to whomever presents the solution first. As soon as it got competitive, people started mining pools whereby the pool instead presents the winning solution to the network, receives the reward, and redistributes to everyone in the pool. Most people prefer this since they'll at least receive something.

For Bitcoin mining, if your computer can do this calculation faster than anyone else, you represent a greater share of the work going towards each solution. However, the rate of coins being distributed is roughly constant, so more people involved means less for everyone participating. (My Mac mining client of choice these days is Asteroid. It's lightweight, has a clean UI and MobileMiner support. More on Asteroid in a future post...

The particular algorithm chosen by the bitcoin developers was SHA-256. First CPUs were used to calculate it. Then someone found a way to execute this algorithm faster on GPUs. Then eventually, someone designed an application-specific-integrated-circuit (ASIC) that takes a specific input, calculates it, and spits out the result, repeatedly and forever. The latter is of course the most efficient, and is where we stand today.

Bitcoin difficulty rises algorithmically as more miners come online - Jason O'Grady

Litecoin

A group of people saw this hardware race as detrimental, and sure enough we see the effects of it -- namely expensive/risky hardware on an quickly rising difficulty level. Thus it's very difficult to continue participating without large investments to stay ahead. This group of people proposed a new coin type -- Litecoin (LTC) -- that relied on an algorithm that would be resistant to a rapidly escalating hardware race, one that needed fast memory and lots of it. These components are more expensive and present a serious barrier to entry for a Litecoin ASIC that would be economical.

Update: The Fibonacci project is a Scrypt (Litecoin) ASIC project that's currently in development. It looks like Litecoin mining hardware is coming to market after all. 

Litecoin also has four times as coins scheduled to be mined (84 million versus bitcoin's 21 million), which may make it more accessible to future participants. Perhaps not though, as both coin types can be subdivided to eight decimal places. Litecoin also does not have much of a point-of-sale market, nor online market, yet, outside of exchanges. But that said, it will be easy to accept Litecoin in a world that also accepts Bitcoin (since the technologies are nearly identical), so the ending on how this all plays out certainly hasn't been written yet.

Most Litecoiners interested in short-term gain will sell their coins on an exchange for BTC or USD. Long-term investors may be sitting on their coins for years before they consider spending them, to watch how/if their value changes and hoping for a Bitcoin-like rise.

After Bitcoin and Litecoin, there's a huge drop-off in quality. All of other crypto-currencies (a.k.a. "altcoins") are essentially tweaks to Bitcoin and Litecoin that use either one of those two mining algorithms. From an investment perspective, they're even riskier than BTC and LTC. Many people compare altcoins to penny stocks due to their very high volatility. There have even been a number pump-and-dump schemes on these coins lately to take advantage of people who may have invested in them. 

Topics: Apple, Hardware, Software

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18 comments
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  • Very Good Summary

    What do you think of PrimeCoin, which (I understand) uses newly discovered prime numbers as digital coins? Prime numbers have practical value to cryptologists outside of digital currency, unlike the hash solutions of Bitcoin and Litecoin.
    ricegf
    • Not Getting

      Commercial applicability has only a little to do with the value of speculative metals. I suspect gold and silver remain foremost because of their traditional place, rather than the need by industrial sectors. Indeed, our reduced need for photographic film should lower the price of silver, if industrial need was a major factor in investor pricing.

      The ability to detect dilution and the resistance to chemical destruction via many acids may be the reason why, way back before history, gold and silver became metals of value.

      As to BitCoin versus PrimeCoin or other variations on a theme, value resides entirely on what another party to a transaction accepts. Any scheme has an element of artificiality: who cares if it's a hash or new prime number, as long as the value of a long complicated verified computation is accepted as currency.

      Unlike Mr. O'Grady, I have no investments that rely on the value of these private-sector-digital-mintings rising or falling. You may call me clueless as you wish. And, shame on ZDNet's editorial oversight process for letting such a tenuous link to the Apple/Mac beat be the news hook upon which he writes news stories that, at best indirectly, promote his investments.
      DannyO_0x98
      • After-thought

        Rarity and difficulty in mining aided gold and silver's choice as precious metals.
        DannyO_0x98
    • Primecoins value

      An interesting side effect of mining Primecoins is you might be helping someone breaking your own encryption, by producing the primes of your own asymmetric crypto keys. By the same measure, you might have already calculated the sha256 hashes used to encrypt your password somewhere.

      At the end, someone will do it nevertheless and the question remains whether you will want the reward for it, or not.
      danbi
  • Great research

    Very knowledgeable post!
    Hey you might be interested in reading this essential Infographic about the phenomenal rise of Bitcoin as virtual currency : http://bit.ly/bitCoins
    Aanchal Mehta
  • The unofficial Bitcoin Anthem- "The Bitcoin Freestyle"

    http://www.youtube.com/watch?v=HllRLsp-IQ8
    Bit Coin
  • Not the biggest fan of mining to begin with . . .

    While the concept of "mining" coins with is interesting from a philosophical point of view, I'm not sure I'm really comfortable with the concept of introducing coins into a currency system basically being a large scale lottery.

    And having an ultimately limited supply of currency means long-term deflation and no control over short term inflation or deflation.

    IMO they need to be thought out more. They're very interesting from a technical point of view, but I don't think they're ready for mass adoption. I'm holding out for better options.
    CobraA1
    • crypto currency has other benefits

      There is no way for someone, such as a government or a bank, just print more money when they need it. Think about it.

      The money will have to be always generated and the total number of coins is limited. There is no way to generate inflation.


      Speculation is another thing and it happens mostly because some people have the cash and have no idea of its real value.
      danbi
      • All I see here is a tinfoil hat.

        "There is no way for someone, such as a government or a bank, just print more money when they need it. Think about it."

        Because they all want to give everybody hyperinflation.

        All I see here is a tinfoil hat.

        "There is no way to generate inflation."

        Not all inflation is bad. And not all deflation is good. Being able to control inflation is important - and if you have no way to generate a small percentage of inflation, you may end up with a broken economy.
        CobraA1
  • no coins

    I have yet to catch a snipe in my bag, and imagine that bitcoins are just as hard to find. It is getting dark, and here I am holding the bag :( I think I will stick with real currency.
    mytake4this
  • dogecoin to the moon

    much profit!
    smokefrogg1
  • btc

    If your looking for free bitcoin (not a lot but free) then try this site http://freebitco.in/?r=144047
    shameless plug for referral.
    bithusiast
  • litecion

    right now, I just wanna buy few coins and expect a bitcoin-like inflation of this crytpo-currency. I dont see mining with good eyes, coz using my vid card to the max potential for months will reduce the mtbf of the hardware.
    Luis Esc
  • mining machines

    Can I use a mining machine bought with intentions of mining bitcoins to mine lite coins ?
    wildman2012
  • Peercoin and Primecoin

    "After Bitcoin and Litecoin, there's a huge drop-off in quality. "

    Huh? Let's be honest here... Peercoin/Primecoin is far more innovative than Litecoin.
    John Manglaviti
  • Boom

    The digital currency boom will be as big as the dot-com boom.

    http://www.alexlewicki.com/3-alternative-digital-currencies-that-should-be-in-your-wallet/
    Alex Lewicki
  • Genius

    The creator of bitcoin is such a maths genius. People are exhausting computing powers from laptop to GPUs to ASICs to just doing the reverse engineering / calculations.

    http://daddiest.com/bitcoin-mining-calculator-asic-gpu-laptop/
    daddiest
  • Bitcoin is infinitely divisible!!

    Why does everyone posting articles pretending to know about Bitcoin, always say it can only be divided to Satoshis or .00000001?

    Bitcoin is infinitely divisible. Meaning that 1 bitcoin could support the entire economy / market cap for everyone using Bitcoin. Or for that matter, if there was only .00000001 Bitcoins in circulation it could be worth $10 Billion and still Bitcoin would work just fine! We can use .0000000000000000000001 Bitcoin to buy a Hamburger off the dollar menu.

    Having limited supply also insures that holding on to your Bitcoins (assuming they will become accepted as a currency and people continue using them) you are guaranteed to eventually increase the value of your investment in bitcoins.

    Also, the fact the Litecoin is capped at 84 million vs 21 million is irrelevant. Maybe for now Litecoin is easier to mine, but eventually it too will become just as difficult as bitcoin. It also is irrelevant how many Litecoins are in circulation because it is also infinitely divisible!

    Get the facts straight.
    Danny Newman