Litecoin has been having a good year.
While many digital currencies have been struggling during the so-called crypto winter, litecoin has been enjoying significant upside.
Thus far in 2019, the cryptocurrency has rallied more than 100%, climbing from $30.35 on January 1 to $62.77 on March 17, CoinMarketCap data shows.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Prime dealer SFOX sought to explain what caused these gains in an industry report, pointing to five key factors:
Merchant Adoption Has Increased
The industry report emphasized that litecoin, created in 2011, was designed to be a "frictionless, borderless, peer-to-peer electronic cash."
As a result, anything that helps the digital currency fulfill this purpose can potentially boost its price.
In the years following its release, the number of businesses that accept litecoin as a means of payment has increased significantly.
The digital currency experienced a major breakthrough on February 12, when the Twitter account for mobile app Spend announced it was offering litecoin functionality, allowing people to use the digital currency as a payment method for more than 40 million global merchants.
Transactions Have Become Faster
Litecoin has been making progress toward decreasing its transaction time, which is crucial in helping this digital currency serve as a viable medium of exchange.
Both the number of active nodes and payment channels on litecoin's lightning network have been on the rise this year, helping enable more rapid payments.
The number of active nodes surpassed 100 in January, and was close to 175 at the time of this writing, according to data provider 1ML.com.
Further, the number of payment channels has increased from fewer than 300 in January to more than 1,100 at the time of this writing, additional figures from 1ML.com show.
Transaction Fees Have Been Falling
Litecoin's transaction fees have declined over the last year, making it easier for users to leverage this digital currency as a medium of exchange.
In a single year, median fees for these transactions have declined nearly 75%, according to BitInfoCharts data analyzed by SFOX.
The authors of the report also pointed to anticipation surrounding the release of Litecoin Core 0.17.1, which is expected to lower the fees associated with litecoin transactions by a factor of 10, as potentially bolstering the digital currency's price.
Another major development that could potentially bolster litecoin prices is the halving event scheduled for later this year.
In August, the mining incentive will decrease by 50%, reducing the rate at which new litecoin enters the market.
Investors may have already started pricing in this event, pushing the digital currency higher, CoinDesk reported last month.
This wouldn't be the first time, as the SFOX report emphasized that the market had "historically" priced these events in beforehand.
Another factor that may have placed upward pressure on litecoin prices over the last few months is anticipation surrounding potential upgrades that could provide the digital currency's transactions with greater privacy.
In January, litecoin creator Charlie Lee tweeted that "Fungibility is the only property of sound money that is missing from Bitcoin & Litecoin."
"I am now focused on making Litecoin more fungible by adding Confidential Transactions," he added.
On February 7, it was announced that the Litecoin Foundation had reached out to Beam, a confidential and scalable digital currency, about implementing Mimblewimble.
If implemented, the Mimblewimble protocol would help make litecoin transactions virtually untraceable.
SFOX emphasized that while the broader cryptocurrency market experienced a notable increase in volatility between February 7 and 8, litecoin's change was far more significant.
The chart below helps illustrate this situation. It shows the 30-day historical volatility of several digital currencies.
Analysts Weigh In
When asked about SFOX's proposed explanation, analysts offered mixed responses.
Analyst Mati Greenspan, for example, said that he "100%" agreed that the five factors identified in the report fueled litecoin's 2019 gains.
Josiah Hernandez, chief investment officer of Satoshi Capital, however, offered a different point of view.
He claimed that the recent price rally is "largely speculative" and likely driven by "anticipation of an approaching cyclical Bitcoin bull market and Litecoin's mining reward halving in five months."