Litecoin analysis: what can we expect from Litecoin in 2021?

Litecoin has struggled in September. The LTC token is trading at $151, which was about 36% below the highest level during the month. This price is also about 62% below the year-to-date high of $413. It has a total market capitalization of more than $10.8 billion, making it the 17th biggest cryptocurrency in the world, according to CoinMarketCap.

Litecoin tracks Bitcoin

Litecoin is a cryptocurrency that works in a similar method like Bitcoin. It uses a proof-of-work technology, meaning that miners generate new coins by completing complex mathematical calculations. This makes it a relatively power-hungry cryptocurrency, unlike others like Cardano and Polkadot that use a proof-of-stake consensus mechanism.

Litecoin was created to be an alternative to Bitcoin. Today, its transaction fees are significantly lower than that of Bitcoin while the overall speed of transactions is faster. Therefore, many people prefer using Litecoin to avoid the clogging that happens in Bitcoin.

At the same time, Litecoin has a close correlation with Bitcoin. Indeed, data compiled by IntoTheBlock shows that LTC has a correlation coefficient of 0.90. Indeed, Litecoin rose to a high of $415 in March on the same day that Bitcoin reached an all-time high of near $65,000. Like Bitcoin, it also declined by more than 70% and reached a low of $104 in June. The two have been attempting to bounce back since then.

Litecoin and Bitcoin chart

Why LTC has lagged

There are several reasons why Litecoin has struggled moving back to its YTD high. First, there are concerns about the ongoing Chinese crackdown on cryptocurrencies. In September, the People’s Bank of China (PBOC) reiterated that all cryptocurrency transactions were illegal in the country. It also barred offshore companies like Binance and Huobi from offering crypto services to Chinese citizens.

Second, like Bitcoin, Litecoin has struggled because of the overall hawkish tone from the Federal Reserve. With the American unemployment rate falling and with inflation rising, there are risks that the Fed will start shifting its tone. Indeed, in its September monetary policy statement, the bank signalled that it will hike interest rates about 7 times by 2024.

In theory, a hawkish Federal Reserve is often viewed as being negative for risky assets like growth stocks and cryptocurrencies. Besides, the loose monetary policy was the main catalyst that helped push cryptocurrency prices to record highs.

Third, investors have grown relatively fearful about the current market conditions. For example, there is an ongoing debate in the United States about government shutdown and default. With time running out, there is a likelihood that a partial government shutdown will happen.

Also, there is a possibility that the government will default on its obligations. This is the main reason why stocks have struggled lately. There is usually a close correlation between Litecoin and US equities.

Some catalysts for Litecoin

On the other hand, there are some positive catalysts that could push Litecoin higher. First, user adoption is growing around the world. For example, it is now possible to buy Litecoin with PayPal in the UK, US, and other countries.

According to PayPal, UK users can now buy, store, and even trade Litecoin, Bitcoin, and Ethereum using its platform. This was notable since PayPal is one of the biggest financial services companies in the world with a market capitalization of more than $325 billion. More fintech companies have also embraced the token.

Second, there is a likelihood that the hawkish tone by the Fed and other central banks has already been priced by the market. Finally, more institutional investors are continuing to allocate their resources in leading cryptocurrencies like Litecoin.

One of the best-known Litecoin funds is the Grayscale Litecoin Trust, which has more than $229 million in assets under management. These assets have risen by more than 225% in the trailing twelve months.

Another positive catalyst for Litecoin is seen in on-chain data analysis. According to Glassnode, the number of active addresses has continued rising in the past few weeks as shown below.

Litecoin number of active addresses

Other on-chain metrics show that activity in the network is relatively stable. Transaction fees have been elevated while the number of transactions are hovering near their all-time high. Still, historically, there is usually a lag between on-chain metrics and a cryptocurrency’s price.

Litecoin price prediction

The weekly chart shows that the LTC price has been under pressure in the past few months. It has already declined by more than 60% from its highest level this year. This decline seems to be part of the cup and handle pattern formation. In price action analysis, a cup and handle is usually a sign of a bullish continuation pattern.

Therefore, there is a possibility that Litecoin will bounce back in the fourth quarter of the year. If this happens, the main reference level to watch will be the YTD high of $412.