Litecoin — the Silver to Bitcoin’s Gold (Part II)

In the previous article, we have introduced Litecoin (LTC) right from its development history to work mechanism to how transactions are recorded in its blockchain, 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.

1. 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.50 Bitcoins were produced initially per block and then gradually halved after every production of 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 in 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.

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 Nov. 2012, post the Bitcoin reward halving event, Bitcoin saw a price surge of over 80%. Similarly, Bitcoin price skyrocketed from $651 to $2518 after its second reward halving happened 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 with Bitcoin, Litecoin undergoes a reward halving roughly every four years, with the latest happening on Aug.26th, 2015 when Litecoin reward reducing from 50 LTC to 25 LTC. Theoretically, the block generation halving will lead to a cut in supply and trigger the price to rally. Since Litecoin’s price is heavily influenced by the supply and demand factor, some speculated that a cut in supply would lead to a subsequent increase in the price of Litecoin. However, in reality, things might turn out differently as many other factors and variables come into play.

Litecoin(LTC) Price Trend Pre and Post Mining Reward Halving

According to the historical data shown above, Litecoin went through a consolidation phase for around three months before the halving happened on Aug. 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 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 Litecoin block reward halving event and a vertical data analysis of Bitcoin’s two halving events, we make the following conclusions:

1) Both Bitcoin and Litecoin went through a consolidation phase for several months leading up to their block reward halving event.

2) 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.

3) 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 Aug, 2019.

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

The following part will predicate its market impact from supply & demand and benefits & costs’ perspective along with how the stakeholders will be affected.

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.

Litecoin halving event elicits a brief “sell the news” reaction from the market in the weeks leading up to the event, but the price pulled 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 a 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.

(2)Factors that affect people’s demand for Litecoin

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

Following are the factors that will potentially affect market demand for Litecoin as follows,

*Network Performance and Technology Upgrade: Litecoin’s unique technologies in SegWit and Lighting Network makes it faster in transaction confirmation compared with Bitcoin network, which has become a prime selling point for Litecoin.

*Competitor products: The development of the competitor or emerging products will also divert some interest from Litecoin, thus affecting its supply and demand situation.

*Market Sentiment: Market sentiment affects the potential investors and traders. Litecoin’s block halving event could make people speculate on “sell the news” to push it to a hype, but the negative news will significantly hurt its price performance.

*Government regulations on cryptocurrencies: Alongside other major coins, Litecoin price will fluctuate if major countries change their attitudes towards cryptocurrencies.

*Hacking incident: Serious hacking incidents led to many exchanges shutting their shop forever. Likewise, a similar incident on a blockchain might erode people’s trust in its underlying values and its coin will also suffer significantly.

2) Price is the Major Factor that affects the whole Network’s Hashpower

Source: LTC Block Explorer

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.

(3)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 price will decline afterwards. This cycle may fuel the deceleration of Litecoin price until the market finds its stable point and more miners will join again.

The mining cost will in turn affect Litecoin price trend

3) Factors that Affect Litecoin Mining Cost

In essence, mining is a math competition where all mining equipment around the world are 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 the Litecoin or any other mined coins distributed by the network to miners for finding the hash value and successfully solved block.

Has 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 is that the miner or the pool has to 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, miner will suffer losses instead of making any profitability.

The miner shut-down 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, then the less variable is the block rewards in a certain amount of time (4 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 shut-down 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 the half the coins per block after halving, and you will get a mining machine shut-down price twice as much as the original price after halving.

OK Mining Pool

As 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 shut-down price is RMB 251.87, or around $37.63(based on the exchange rate of RMB6.69 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.

Litecoin’ Bottom Price Range

As 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 shut-down price of $37.63. However, looking at the bottom price of Litecoin pre and post block reward halving, its bottom price averaged around $1.8 and picked up to $3.88 after the halving event, 2.15 times of the bottom price pre halving.

5. Impacts posed to the Stakeholders

1)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 price was in a Bull Run cycle.

2)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 last halving event, down about 7.61% on Aug.27nd, 2019, which represents that some miners had exited the mining activities.

3)Mining Pool: The block reward halving leads to an increase in the cost of mining, which will 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 mining, and mining activities will become more concentrated in a few pools.

4) Litecoin Holders: The block reward halving event will incentivize more retail investors to buy Litecoin before the halving happens and may dump the coins when the event completes.

6. References

  • TokenInsight
  • Mining industry report 2019 Q1
  • Reshuffle History of the Top10 Cryptocurrencies
  • Industry Research Report: Industry Turning Point and Economic Cycle of Bitcoin Mining
  • Bitcoin Gold, Litecoin Silver: Price Predication after Block Halving Event