TLDR Litecoin is trying to beat Bitcoin to SegWit, which can quadruple transaction capacity. Bitcoin needs 95% agreement amongst miners but Litecoin only needs 75%. If you want to trade it then make sure you set a stop loss and sell if it pumps, it’s probably not a good long term trade.
I’m sitting on the beach having a week off from trading, which was a pretty bad idea really considering the massive pumps we’ve seen this week such as Pascal and Jumbucks. These are obscure low market cap coins but there’s also been some attention this week on Litecoin beginning to signal for SegWit, the short hand word for Segregated Witness. The newbies here may have heard of Litecoin but not too much about SegWit, so I just thought I’d write a simple account of what SegWit is, why it’s important and, from a trading perspective, if it’s worth taking a punt on Litecoin.
I’m not going to get technical because people in crypto tend to focus more on the technical things rather than the practical benefits for users, and that scares the newbies off so I’ll just focus on what it will do. In fact, SegWit does many things but the main advantage is that it has the potential to increase the number of blockchain transactions per second. This is a big deal, and to explain why let’s forget about Litecoin for a moment and go back to the granddaddy Bitcoin.
The way Bitcoin works means that the Bitcoin network can only process 3-7 transactions per second. Back in the day when Bitcoin was unknown this wasn’t a problem but now Bitcoin has grown to have a huge user base, the network is reaching its capacity and it is resulting in a backlog of transactions. Some people are reporting waiting more than 12 hours for a Bitcoin transaction to process. Obviously, if Bitcoin is to grow further then it needs to increase its capacity somehow.
However this is easier said than done. Making changes to the Bitcoin protocol is a risky thing to o when it has so many people actively using it as there is always the chance things could go horribly wrong and messes up active transactions. Furthermore most suggested solutions would require a hard fork, which basically means everybody using Bitcoin would have to download an update before they can start using SegWit. SegWit on the other hand would be a soft fork, which would be an update that doesn’t require everybody doing a manual download to update. The words hard fork and soft fork is effectively just crypto lingo for the word ‘update’, in case anyone new isn’t sure.
So SegWit has the potential to solve what is becoming a big problem for Bitcoin, at least in the short term. SegWit has the potential to quadruple transaction speed, although on average it is more likely to double transaction speed. In other words, the Bitcoin network would be able to handle up to 14 transactions per second.
Now this still isn’t very much but would be a short term solution. However SegWit is somewhat of a precursor to a longer term solution known as the Lightning Network. The Lightning Network is being developed to handle Bitcoin transactions off the blockchain and will make it possible to process thousands of transactions per second, and what’s more the transactions would be instant rather than having to wait for the next block release (up to an hour). This would indeed be a big deal and solve the scalability problems that Bitcoin is facing, however the Lightning Network would work much more effectively with SegWit than without it (I won’t bore you with the technical reasons why).
Increasing capacity from 7 transactions per second to thousands sounds like a good idea right? Well it is, but not everybody agrees and this is where it gets difficult. For Bitcoin to start using SegWit, 95% of miners need to agree to it. People disagree on everything all the time (just look at how divisive people are over Trump) and getting 95% agreement on anything will be difficult even if to most it seems like a no brainer. There will always be people who disagree with the popular consensus whether that be for economical, philosophical or political reasons. At the end of the day, there are some people who just like Bitcoin the way it is and don’t want it to change. There are also others who feel the change could be implemented in another way.
That leaves people wondering if SegWit is ever going to happen for Bitcoin, indeed it’s possible that it won’t. Meanwhile, there are other coin developers who think it’s a good idea and are considering implementing it into their coin. Step forward Litecoin.
Litecoin has different fundamentals to Bitcoin and one of those fundamentals is that only 75% agreement, rather than 95%, would be needed amongst miners to implement SegWit. Whilst 75% is still a lot, it’s certainly a lot more of an achievable target than 95%. The truth is though whilst it might be easier to implement SegWit on Litecoin, it doesn’t really need it. At least not yet anyway, because it isn’t even close to experiencing the same capacity problems that Bitcoin is having. Maybe the developers are looking ahead to the future, maybe it’s just a gimmick to get attention or maybe it’s being implemented because a lot of people think SegWit is a good idea. Personally I feel it’s a bit of a gimmick.
However as a trader it doesn’t matter whether I think it’s a gimmick or a good thing, what I care about is if and how it’s going to affect price. Litecoin has already had its moment on top volume spot on Poloniex and price barely moved, so it’s quite possible that SegWit won’t have any effect on Litecoin and the downward trend will continue.
The truth is I can’t tell you what is going to happen next. Trading isn’t about getting it right every time, it’s about strategy. I’m going to go with the same strategy that has worked for me in the long run, and that is buy it in case it does pump but set a stop loss in case it doesn’t. This will mean I will get to profit if it does pump and if it doesn’t then my loss will be minimal. A good trading strategy minimizes losses and maximizes gains, it doesn’t matter if you don’t get it right every time. Probably in half of the cases I don’t, but because I’ve maximised my profits on the winning trades and minimised them on the losing ones then I’m up overall. If you do decide to buy though I suggest you don’t hold it for too long, Litecoin has a history of having huge spikes before returning quickly to where it was in its downtrend.
Well that’s my two bitcoins on Litecoin signalling for SegWit, now techies and experts please don’t knock me too much I’m trying to keep this as simple and concise as possible for the newbies looking to get an intro. However whether you are experienced or completely new, it would be great to hear your views on what will happen to the Litecoin price in the comments below....