The third largest digital asset, in terms of market capitalization, Litecoin (Market Ticker: LTC) is set to cut its mining reward in half, come early August. Halving events, a deflationary mechanism coded into the blockchain, are historically preceded by robust market activity. There are four possible scenarios that could come into play according to Binance’s research wing.
The 2011 brainchild of former Google employee, Charlie Lee, Litecoin derives most of its source code from Bitcoin’s Github repository, though It sports a Scrypt hashing algorithm as opposed to Bitcoin’s SHA-256 as well as a block production time of 2.5 minutes instead of 10 (as with Bitcoin). The digital asset’s rate of issuance is designed to decay by half, every 840,000 blocks (about 4 years or so), implying the digital currency’s finite supply.
Factors To Consider
With the block generation reward for Litecoin set to drop from 25 LTC to 12.5 LTC on August 6th, 2019. The event carries with it a number of implications. The fact that mining rewards are cut in half possibly means that the network could see fewer miners supporting it, opening it up to a potential 51% Attack.
Litecoin currently carries an inflation rate of around 8,4% per year, which is projected to drop to around 4% following the halving event. Other factors to consider, concerning Litecoin’s halving event are: owing to the lack of Litecoin based hedging markets (Litecoin futures markets) profitability is dependent on price.
One must also consider that Litecoin has a far lower on-chain transaction rate than Bitcoin so a greater proportion of miners’ revenue comes from block rewards as opposed to transaction fees (0.12% of Litecoin’s block reward constitute transaction fees, whereas transaction fees on bitcoin make up 6%-8% of mining the mining reward.
Past Halving Events
Since inception, Litecoin has only had one halting event (August 26th, 2015), which saw Litecoin leap from $1.5 in the 3 months prior to the halving event, to $3 post having (having experienced a $7 peak pre-halving, in mid-July of that year). Litecoin’s hashrate however, only experienced a 15% drop around the halving event before recovering in the two weeks following the previous halving event. Indicating that miners had opted to support the network, contrary to predictions. The pre-halving rally had in fact compensated for the drop in mining reward.
“As a result, post-halving mining profitability was only inferior by a few percent to the long-term median profitability (around 38 USD/day per GH/sec).” – Binance Research
Bitcoin Halving Events
Bitcoin, which has been around longer than Litecoin, has experienced two halving events since inception. On November 28th 2012, Bitcoin’s block reward went from 50 BTC to 25 BTC, and on July 9th of 2016, it experienced it’s second halving event – with the reward going from 25 BTC to 12.5 BTC per block.
Bitcoin’s first post-halving rally saw the crypto asset’s price movements compensate for the drop in mining profitability. The second halving event, however, played out differently. The ballooning competition in the mining industry, as well as an increase in mining difficulty, saw block profitability drop significantly both before and after that particular halving event.
Possible Halving Scenarios
Bullish Price Movements Before Finding Stability At New High
This scenario is probably the most likely, as Litecoin has been rallying since the opening of this year and has gone on to log a 200% return Year-on-Year while the rest of the crypto market is up over 40%
An Increase In Litecoin Hashrate Prior To Halving Event
More miners may opt to mine Litecoin before the halving event in anticipation of the impending drop in mining rewards. This may lead to a rise in the crypto asset’s hashrate – and by virtue of that – the mining difficulty. According to BitInfoCharts’ comparison tool, Litecoin’s hashrate has been rising since the beginning of the year.
Mining Profitability Adjusts To Compensate For Miners Exiting The Network
In the event that miners opt to switch to supporting more profitable cryptocurrency networks (unlikely, given the spike in hashrate), Litecoin’s hashrate would fall leading to the drop in competition compensating for the decrease in block rewards.
A drop in Litecoin’s hashrate, resulting from a drop in the number of miners supporting the network could leave it vulnerable to a 51% Attack, thus making it more centralized, as one group would control majority voting power and would more than likely voting in favour of their own update proposals.
Mining Profitability Drops Permanently
If Litecoin’s price fails to stabilize at a higher price point than before the halting event (In the 90 days post halving event) then mining Litecoin may become unprofitable. Seeing as profitability wasn’t affected in the last halving event, it is difficult to determine how miners might react to a drop in mining profitability from supporting the Litecoin network.
It seems that the next Litecoin halving will mark a chapter in the cryptocurrency halving events textbook. As it appears, an increase in prices resulting from the reduction in Litecoin supply as well as an increase in use tie heavily into Litecoin’s future profitability, as far as mining is concerned.