The halving date of one of the oldest cryptocurrencies, Litecoin (LTC), is approaching. This event will take place approximately on August 6, 2019. It is possible that this is the decline in the miner’s reward that is the main fundamental reason for the optimism of investors. Indeed, after halving, LTC inflation will drop significantly, and the asset will become scarcer. A decrease in supply with unchanged or increasing demand usually means an increase in price.
Cryptocurrency Litecoin (LTC) was created in 2011 by former Google employee, Charlie Lee. Despite a solid age by the standards of the crypto industry, this asset is still quite popular and is now on 4th place by capitalization.
LTC was based mostly on the Bitcoin’s software code. However, there are several significant differences between these two cryptocurrencies. For example, unlike Bitcoin, Litecoin is based on the hashing algorithm Scrypt, not SHA- 256.
In addition, the production time of the LTC block is 2.5 minutes, which is 4 times faster than that of BTC. Largely due to this, transactions in the Litecoin network are much faster than the first cryptocurrency. It is possible that for this reason LTC, as a lighter and more time-tested alternative to Bitcoin, is often called digital silver. It is worth mentioning that the maximum LTC offer is 84 million coins, which is four times more than digital gold.
As is known, BTC halving takes place once every four years, every 210,000 blocks. The next halving of the award to bitcoin-miners will take place in May 2020. Litecoin implemented similar mechanism limiting emissions, but division reward occurs every 840 000 blocks. However, LTC halving also occurs every four years. The same interval between halvings for these coins is explained by the fact that Litecoin blocks are mined four times more often than their older brother.
Why digital silver needs halving?
The current Litecoin block reward is LTC 25. At block 1.680.000, the volume of regular emissions will be halved to 12.5 LTC.
Halving plays an important role for cryptocurrency based on the PoW (Proof-of-Work) consensus algorithm. It represents a significant fundamental factor, which inevitably affects the price of cryptocurrency the day before, during and after the event. In addition, halving seriously affects the interests of miners, since it significantly affects the profitability of their activities.
For example, a halving that occurred on a specific block instantly reduces the reward for a mined block by half. Accordingly, under the condition of a constant price, the profitability of the mining of the corresponding cryptocurrency is halved.
You can calculate the profitability of mining PoW – cryptocurrency, by dividing the number of coins mined per day by the indicator of complexity. Litecoin mining difficulty is recalculated four times faster than Bitcoin, that is once every 3.5 days, instead of every two weeks. Since the change in the degree of complexity significantly affects the profitability of mining, it is advisable to evaluate the latter not immediately after the halving, but at least after its first recalculation.
If before halving the price of LTC does not grow to such an extent that it will more than compensate for the decrease in rewards, the miners may soon lose the economic incentives for the extraction of this particular cryptocurrency. Halving significantly reduces the rate of inflation or, in other words, the growth rate of the market supply of coins. With unchanged or growing demand, emission limitation has a positive effect on the price of an asset.
Parameters to reduce the reward (such as its frequency, a specific block, etc.) are tightly written in the program code. Consequently, the cryptocurrency monetary policy is generally more predictable than that of central banks, which resort to currency interventions, changes in the key rate, open market operations, and manipulation of the required reserves to limit the inflation rate to several percent a year.
The consequences of the halving for miners and its influence on the Litecoin price should be analyzed in a comprehensive manner, taking into account various and, at first glance, insignificant factors.
For example, note that Litecoin does not have liquid futures markets that allow miners hedge large positions, which is especially important in the face of uncertainty. Consequently, the profitability of Litecoin miners is always significantly dependent on the price of digital silver.
Also, it is necessary to take into account that the miners’ incomes from commissions are insignificant compared with the award for mining the Litecoin block. Moreover, digital silver has a relatively low volume of onchain transactions. Thus, the main source of income for miners is the reward from the mined block. The size of reward almost entirely depends on the market rate of LTC, and not on transactional activity. The daily volume of Litecoin transactions is more than 10 times lower than that of Bitcoin.
In addition, Litecoin also gained popularity with the second level Lightning Network , which in the future can make the miners’ income from transactional commissions even more insignificant.
According to Binance Research, the share of transaction fees in the miners’ income is currently less than 0.12%. Historically, this figure has never exceeded 6%. For comparison, the current share of transactional commissions in Bitcoin miners’ income is 4-8%. In December 2017, when the price of Bitcoin reached an absolute maximum near the $ 20,000 mark, this figure reached 30-40%.
A look into the past
During the 8-year history of Litecoin, a halving in the network of this cryptocurrency occurred only once. This event took place on August 26, 2015 at block 840,000, and as a result, the award decreased from 50 LTC to 25 LTC.
Several important conclusions can be drawn from the previous halving, which may be relevant both in the current year and in the medium and long term.
Before the first halving there was a significant increase in price.
Before halving, the LTC price rose from $1.5 to more than $3 over the course of three months. In mid-July 2015, digital silver reached a local maximum of $7. Also, on the threshold of halving, Litecoin’s price volatility increased significantly. Thus, halving is usually preceded by a revival in the market.
Market cycles and the relationship between halving Litecoin and the price of Bitcoin
The Phoenix Group analysts concluded that the beginning of the cycle of steady growth of Bitcoin approximately coincides with the date of Litecoin halving. In this case, the active and steady growth of the first cryptocurrency occurs about a year before its halving.
After halving in 2016, the price of BTC slipped somewhat, disappointing those who believed in endless “to the moon”. However, a few months later, growth continued with a new force. The culmination of the rally was the $20,000 mark reached in December 2017, which coincides with the top of the cycle (sine wave in the screenshot). According to analysts, this year, most likely, this scenario will repeat.
Before LTC halving Bitcoins may grow up to $12.000 – 15.000, and then roll back to around $8.000. However, shortly thereafter, there is likely to be a new cycle of rapid BTC price growth, comparable to the previous one.
Phoenix Group analysts suggested that a new maximum of Bitcoin will be reached at the end of 2021. It is possible that it will mark the region of $200.000.
Right before LTC halving and in the near future several scenarios would be possible and some of them are not excluding each other:
- Prices continue to rise, contributing to increased miners’ profitability;
- The Hashrate continues to grow, which negatively affects the profitability of LTC production but reduces the risk of a “51% attack”;
- LTC price hikes slow down → miners number decrease → hashrate decrease → increased profitability due to decrease difficulty → new balanced price (possibly higher);
- decline in Litecoin prices in the long perspective.
Only a continuation of the Litecoin price rally can compensate for the decrease in block rewards. The growth in onchain transactions can only marginally affect the profitability of mining.
The LTC halving can serve as kind of a trigger for the phase of active growth of Bitcoin and the market as a whole for the next two years. However, before the start of a new growth cycle, a rather deep but short-term fall in the BTC price is possible.
By Sergiu Marandiuc