A rule embedded within litecoin’s (LTC) code is set to soon reduce rewards for the miners who today ensure transaction processing on the world’s fourth-largest blockchain by total value.
In approximately five days, litecoin will undergo a scheduled reward halving – a process aimed at preserving cryptocurrency’s purchasing power. The mining reward is currently set at 25 litecoins ($2,500) per block and will drop to 12.5 litecoins ($1,200) per block on Aug. 5.
With that transition, the protocol will be adding significantly fewer litecoins to the market after Aug. 5.
The halving, therefore, sounds similar to interest rate hikes and other measures initiated by central banks across the globe when combating high inflation, so investors may feel tempted to snap up litecoins while heading into the event.
However, while the cryptocurrency may pick up a bid in the next couple of days, big gains look unlikely with the price action of the last six months suggesting that an impending supply cut has already been priced in by savvy traders.
LTC doubled in value in the first quarter
Litecoin, which traded at $30 on Jan. 1, ended the first quarter at $61, representing a 100 percent gain. That was LTC’s best first-quarter performance on record, as reported by CoinDesk on March 31.
More importantly, the cryptocurrency eked out stellar gains in the first three months of this year despite the flat action in bitcoin, the leading cryptocurrency.
Essentially, LTC broke into a bull market well before bitcoin confirmed a bearish-to-bullish trend change with a big move above key resistance at $4,236 on April 2. Prices went on to hit highs above $140 in June before falling back to $80 earlier this month.
Litecoin’s non-price metrics have also risen sharply since mid-December, hitting new record highs several times over the last couple of months. For instance, hashrate or computing power dedicated to mining rose to 523.81 TH/s on July 14, up 258 percent from the low of 146.21 TH/s seen in December 2018, according to bitinfocharts.com.
History repeating itself
Litecoin leading the broader market higher with 100 percent gains in the first quarter followed by a rise to highs above $145 in June. Yet, the recent drop to $80 is reminiscent of the price action seen in months ahead of the previous reward halving, which took place on Aug. 25, 2015.
Back then, prices bottomed out at $1.12 in January and peaked at $8.72 in July before falling back to $2.55 by Aug. 25.
More importantly, following the reward halving, prices remained trapped largely in a narrow range of $2.5 to $5.5 before picking a strong bid in April 2017.
If history is a guide, then LTC may trade in a sideways manner post next week’s reward halving, unless BTC makes a move toward the record high of $20,000.
Miner participation may drop after halving
The mining profitability will likely drop by 50 percent along with block rewards, as mining difficulty – a measure of how hard it is to maintain and add to the blockchain – seldom adjusts immediately. So, some miners may shift to other blockchains, leading to a drop in the hashrate.
The computing power, however, may tick higher over the coming months, as the drop in the inflation rate to 4 percent from the current 8.4 percent per year will likely bode well for LTC’s price. That would compensate for the slide in the mining profitability.
It is worth noting that the hashrate had dropped by 15 percent around the previous halving before rebounding in the next two weeks, according to Binance Research.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
Litecoin image via Shutterstock; charts by Trading View