Litecoin (LTC) – The Silver to Bitcoin’s Gold – From Halving Event to Block Reward to Price Impact

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In the previous article, we introduced Litecoin (LTC) right from its development history to its working mechanism to how transactions are recorded in its blockchain to mining pool distribution and much more. In this article, we are going to take a deep dive into Litecoin’s block reward halving, and the impacts on its ecosystem.

I. Definition of Block Reward Halving Event

When Satoshi Nakamoto developed the Bitcoin mechanism, he mandated that Bitcoin production per block will be halved after every 210,000 blocks are mined. Fifty Bitcoins were produced initially per block and then are gradually halved after the production of every 210,000 blocks until all blocks are mined out. In simple terms, every block could produce 50 Bitcoins at first, and this figure will be halved every four years until 210,000 blocks are reached. Also, the difficulty of the calculation is adjusted frequently to make sure that it takes about 10 minutes on average to process a single block.

Historical Bitcoin Halving Performance % (Cumulative LN)⁷

As per the above calculation, all 21 million Bitcoins will be mined out by 2040. Bitcoin surged exponentially after every reward halving event, and then gradually returned to its reasonable price range after the hype cooled off. In November 2012, post-Bitcoin reward halving event, Bitcoin saw a price surge of over 80%. Similarly, Bitcoin’s price skyrocketed from $651 to $2,518 after its second reward halving in July 2016. The two block halving events were both followed by bull market cycles, as people generally held positive attitudes towards its future market directions.

1. Litecoin (LTC) Block Reward Halving

Similar to Bitcoin, Litecoin undergoes a reward halving roughly every four years, with the latest happening on August 26th, 2015 when Litecoin reward reduced from 50 LTC to 25 LTC. Theoretically, the block generation halving will lead to a cut in supply and trigger the price to rally.

However, in reality, things might turn out differently as many other factors and variables come into play.

According to the historical data shown above, Litecoin went through a consolidation phase for around three months before the halving happened on August 26th, when Litecoin (LTC) climbed from $1.3 to $8.96, a rise of 689.23%. However, it pulled back afterwards, landing at $2.95 on the day of the halving event. Also, Litecoin failed to stick to the bull trend and pulled back soon after the halving event.

After a horizontal data analysis of the Litecoin block reward halving event and a vertical data analysis of Bitcoin’s two halving events, we make the following conclusions:

• Both Bitcoin and Litecoin went through a consolidation phase for several months leading up to their block reward halving event.
• The market reaction to Litecoin’s block reward halving reflected soon after the event and the impact faded gradually, which is not the same case with Bitcoin, as it saw a price surge even after the event.
• Some investors did speculate on Litecoin’s block reward halving event and made quick money, but pulled their hands off after the event completed.

Litecoin is scheduled to go through the second block reward halving event in August 2019.

What impacts will it impose on the Litecoin ecosystem this time?

II. How the Supply and Demand Will Affect Litecoin’s Development

Interrelationship between supply and demand is the key to underlying laws of market economy. Akin to any commodity, a decrease in supply paired with no change in demand generally leads to higher price. Therefore, many investors will price in the Litecoin block reward halving event on the prediction that the supply of Litecoin will decrease in the future with the rising demand in tandem.

The Litecoin halving event elicits a brief “sell the news” reaction from the market in the weeks leading up to the event, but the price may pull back once the demand has adjusted to its reasonable range.

1. Supply and Demand Is a Key Factor in Deciding Litecoin’s Price

The relative decreased supply will motivate people to buy Litecoins on its highs and push it to higher highs which makes the mining difficulty even harder, and some miners will exit the market as their computing power can’t compete with others or they can’t afford the higher cost incurred by the increasing mining power. With more miners exiting the mining activity, mining difficulty decreases and eventually price will decline. In short, supply and demand determines Litecoin’s price, which in turn affects its mining power and costs.

Factors that affect retail demand for Litecoin

Dubbed as a lighter version of Bitcoin, Litecoin’s advanced technologies in SegWit, Lighting Network and work algorithm enhance its transaction and confirmation speeds. Faster block time reduces the risk of double spending attacks as well.

These following factors may affect market demand for Litecoin.

• Network performance and technology upgrade – Litecoin’s unique technologies in SegWit and Lighting Network make it faster in transaction confirmation compared with the Bitcoin network, which has become a prime selling point for Litecoin.
• Competitive products – The development of competing or emerging products will also divert some interest from Litecoin, thus affecting its supply and demand situation.
• Market sentiment – Market sentiment affects potential investors and traders. Litecoin’s block halving event could make people speculate on “sell the news”, creating hype, but negative news could significantly hurt its price performance.
• Government regulations on cryptocurrencies – alongside other major coins, Litecoin’s price will fluctuate if major countries change their attitudes towards cryptocurrencies.
• Hacking incidents – serious hacking incidents led to many exchanges shutting down shop forever. Likewise, a similar incident on a blockchain might erode people’s trust in the underlying value, with its coin also suffering significantly.

2. Price Is the Major Factor That Affects the Whole Network’s Hashpower

The above chart shows that mining difficulty and price generally move hand in hand. The price increase will push up the mining difficulty and the computing power, and vice versa. Generally speaking, the difficulty of mining in Litecoin increased gradually from February, 2018, and the increase or decrease in the price of Litecoin was positively correlated with the rise or fall of the currency price.

The Feedback Cycle of Price, Computing Power and Mining Cost

The increasing price of Litecoin will bring more miners into the network, which in turn will push up the mining difficulty and computing power, as the system usually lags behind in the adjustment of the mining difficulty. Therefore, once some miners can’t make profits amid the high mining costs, they will exit the market after dumping their coins, and Litecoin’s price will decline afterwards. This cycle may fuel the deceleration of Litecoin’s price until the market finds its stable point and more miners join once again.

The mining cost will in turn affect Litecoin’s price trend.

3. Factors That Affect Litecoin’s Mining Cost

In essence, mining is a math competition where all mining equipment around the world is competing to be the first to find the right hash value. And the probability of finding the right hash value is the computing power of the miner’s computer/the total global computing power. Plus, the following factors will affect a miner’s cost and profits.

Block reward – Block reward refers to Litecoin or any other mined coins that are distributed by the network to miners for finding the hash value and successfully solving the block.

Hash Rate – Hash Rate is the speed at which a computer is completing an operation in the Bitcoin/Litecoin code. A higher hash rate is better when mining as it increases your opportunity of finding the next block and receiving the reward

Network Hash Rate – Network Hash Rate refers to the total computational power in the Litecoin network. The more hash power a miner or mining pool has, the greater the chance that the miner or pool will mine a block. As miners add more hash rate, more security is provided to the network. The block reward acts as a subsidy and incentive for miners until transaction fees can pay the miners enough money to secure the network.

Operation cost – The operation cost mainly covers the electricity and network cost: the cost of buying the professional mining equipment.

4. Litecoin’s Break–Even Cost

The break-even cost refers to the price when a miner’s profitability in mining activities could only cover his/her cost in mining. It is also referred to as mining cost per coin or the shutdown price of the mined coins. When Litecoin’s price falls below this point, the miner will suffer losses instead of making any profitability.

The miner shutdown price is mainly related to the performance of the mining machine itself, electricity cost, block rewards and the network hash rate. Among these factors, the performance of the mining machines and the electricity cost are relatively stable. Less variable is the block rewards during a certain amount of time (four years), and the most deciding factor is the network hash rate.

Considering the above factors, the break-even point of a miner is as follows:

• Break-even point – the running cost of a mining machine per day = LTC mining profits per day
• Running cost per mining machine – the number of mined coins per day * coin price when shutting down the mining machine
• The mining machine shutdown price – running cost of the mining machine per day/the number of mined coins of the mining machine per day

If the running cost of the mining machine stays the same, and a miner will mine half the coins per block after halving, you will get a mining machine shutdown price twice as much as the original price after halving.

OK Mining Pool

In the data from the OK Mining Pool shown above, the single-day cost of the Litecoin mining machine is RMB7.128, and every mining machine could mine 0.0283 pieces of coins per day. Based on the formula and existing data, the machine shutdown price is RMB 251.87, or around $37.63 (based on the exchange rate of RMB 6.69 per dollar).

The price of the shutdown currency is actually dynamically adjusted. The influencing factors include the proportion of the total mining capacity of the single mining machine mentioned above, the difficulty of mining, the block reward, and the operating expenses. The number of early miners involved was small, and the single mining machine accounted for a relatively high amount of computing power in the whole network. The amount of daily mining will be more than the current 0.0283 pieces, so the early closing price will be lower.

In the chart shown above, the latest bottom price ranges from $23.15 to $41.81, averaging around $32.49, a gap of $5.14 from the shutdown price of $37.63. However, looking at the bottom price of Litecoin pre and post block reward halving, its bottom price averaged around $1.80 and increased up to $3.88 after the halving event, 2.15 times the bottom price pre- halving.

5. Impacts Posed to the Stakeholders

• Mining Machine Manufacturers – The interrelationship between the price of Litecoin and the mining machine orders is, in essence, a kind of supply and demand relationship. When Litecoin picks up in its price, mining pool owners and retail investors are scrambling to buy the mining machines, and vice versa. But it is also no exception that the mining machine manufacturers control the pace of selling mining machines to affect the mining productivity across the industry. Bitmain reportedly sold 100,000 units of L3 when Litecoin’s price was in a bull run cycle.
• Miners – With the increasing computing power across the network, the miners with the backward mining equipment will find it hard to make ends meet and may eventually exit the mining activity. In fact, Litecoin went through the mining difficulty adjustment since the last halving event, down about 7.61% on August 27, 2019, which indicates that some miners had ceased mining activities.
• Mining Pool – The block reward halving can lead to an increase in the cost of mining, which can cause LTC to fluctuate around higher value lines and make miners have higher requirements for the lowest price of Litecoin. With the mining hardware remaining the same, the LTC halving will cause the probability of mining Litecoin smaller and the profit time more uncertain. In this case, regular investors may feel reluctant to get hands on into mining, and mining activities will become more concentrated in a few pools.
• Litecoin Holders – The block reward halving event will incentivize more retail investors to buy Litecoin before the halving happens, and they may dump the coins when the event ends.

This post originally appeared on Medium. Read more.

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