Litecoin’s Negative Catalysts Are Likely to Keep It in a Downward Spiral
Like multiple other cryptocurrencies, Litecoin (CCC:LTC-USD) has some impressive, very useful attributes. But also like most other cryptocurrencies, Litecoin does not look well-positioned to overcome the large hurdles that the asset class faces.
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Additionally, Litecoin’s positive aspects will likely be offset by an important weakness. Given these points, I urge longer-term investors to sell the cryptocurrency.
As multiple reporters and other pundits have pointed out, Litecoin does have some substantial merits.
Specifically, Litecoin processes transactions much more quickly and for way less money than Bitcoin (CCC:BTC-USD). And according to InvestorPlace columnist Wayne Duggan, Litecoin is quite reliable and liquid.
Crypto’s Hurdles Are Likely to Trip Up Litecoin
In past columns, I’ve pointed out some of the problems that cryptocurrencies face. Most importantly, governments and large banks appear to be opposed to cryptocurrencies, as shown, for example, by the negative comments by Treasury Secretary Janet Yellen about the asset class.
And governments can take important steps to combat the efficacy of cryptocurrencies. Notably, the IRS has made every cryptocurrency transaction subject to capital gains taxes, and the Department of Justice recently recovered about half of the Bitcoin-denominated ransom paid to the perpetrators of the cyberattack on Colonial Pipeline. With the latter action, the government showed that cryptos are not as inaccessible to regulators as many had believed, undermining the trust of investors and users in them.
Like many others, I believe that governments and large banks will take additional steps to undermine cryptocurrencies. I wouldn’t even be shocked if the U.S. government and many other Western democracies effectively ban or partially ban cryptos in the future, citing their use by criminals.
While several large companies, including PayPal (NASDAQ:PYPL), Expedia (NASDAQ:EXPE) and Starbucks (NASDAQ:SBUX) accept Bitcoin as a method of payment, far fewer companies accept Litecoin, with PayPal as one of the only notable companies supporting it. So even if cryptos do survive and thrive, Litecoin will be at a meaningful disadvantage to the first movers in the sector, Bitcoin and Ethereum (ETH-USD). As I pointed out in previous columns on Ethereum, a number of large institutions are utilizing it.
The Withdrawal of Government Stimulus
Moving back to trends that are likely to hurt all cryptocurrencies, I believe that there is a direct correlation between stimulus from Congress, the stock market, the Federal Reserve and the prices of cryptocurrencies.
Consider that the last huge boom of cryptocurrencies occurred in 2017. Likely not coincidentally, in the same year a massive tax cut was signed into law and the stock market rallied tremendously. With many people feeling much richer as a result of the stock boom and believing they were about to have more disposable income as a result of the tax cut, crypto prices jumped. As the wealth effect faded, however, the crypto bubble popped in 2018.
Fast forward to 2021. Congress, the Fed, and the stock market have combined to put a great deal of extra disposable income in Americans’ bank accounts. It’s quite reasonable to believe that, as the stimulus is withdrawn and the stock market decelerates, cryptos will tumble again.
Adding to cryptos’ strength earlier this year, Americans had saved a great deal of money by not commuting to work and by greatly curtailing their indoor recreational activities outside their homes.
The Bottom Line on Litecoin
I believe that we’re seeing the beginning of the effects of the unwinding of all of these trends on all cryptos, including Litecoin. In the month that ended on June 11, for example, Litecoin tumbled from around $377 per U.S. dollar to just $165 per U.S. dollar.
In addition to the many hurdles that all cryptos face, Litecoin has to combat the considerable first-user advantage of Bitcoin and Ethereum. As a result, I recommend that investors sell their Litecoin holdings.
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On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
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