Cryptocurrency industry is built around the news. Each announcement, new invention or significant event may influence the market and change the overall situation. One of such things is halving – and on August 5 it will happen to Litecoin.
Since the beginning of the year, Litecoin price has been growing. In our last analysis, we mentioned that the reason for it may be the incoming change in its mining process. Let’s take a closer look at it.
Before moving to actual news according to Litecoin, let’s talk about what halving actually is. By mathematical definition, it is simply dividing by 2. In the cryptocurrency industry, it applies to decreasing the number of coins acquired after a successful mining operation. But why such activities are needed? After all, why should we want to cut in half the earnings of miners, who are the crucial part of the whole system?
It all leads to the decentralized nature of cryptocurrencies. In the case of fiat currencies, the overall supply is centralized. The government determines the amount of money on the market – and there is no limitation of it. In theory, it allows to regulate the market and avoid inflation.
Cryptocurrencies, as decentralized assets, had to take a different approach – especially when some of them have a predetermined amount of tokens. If the rate of mining reminded constant, then all coins would be acquired much faster, leading to inflation. That’s why Satoshi Nakamoto proposed the halving procedure – cutting in half the miners’ rewards to regulate the market.
A common practice
If you’re part of the cryptocurrency market, you probably know that halvings are a quite common thing in proof of work cryptocurrencies. In the case of the most popular ones, Bitcoin and Litecoin, halvings have already happened a few times.
Bitcoin passed this process twice after every 210 000 blocks mined: the first one was in November 2012, the second in July 2015. The closest halving will probably happen in May 2020 – if the rate of mining doesn’t change till that time.
Litecoin faced halving only once, four years ago, after 840,000 blocks mined. It decreased the miners’ reward to 25 for every mined block. On 5 August 2019, it will be divided once again.
Does opportunity await?
Why is this event so important? Lowering the supply creates a higher demand for coins, which leads to a price increase. Higher price for each coin encourages miners to keep maintaining their work despite the lower reward for it. So, in theory, halvings are not only regulating the growth rate of new coins, but they also stimulate the market.
As for now, halvings of the top cryptocurrencies have been associated with bull runs. But does it mean that similar situation will happen after upcoming one? According to some voices, not necessarily. Researchers of Strix Leviathan, an organization providing algorithmic trading software, have made an analysis of 32 halvings of 24 cryptocurrencies.
According to their report, there are no significant differences between “halved” coins and the rest of the market – although the situation is quite different in the case of the two most prominent ones: Bitcoin and Litecoin. As we may read in Strix Leviathan analysis:
LTC has now outperformed the market twice in the pre-halving period with performance falling to the bottom 25% in the six months following the first halving. BTC on the other hand lagged the market leading up to the halving but was in the first quartile of performance following the last halving. The divergence and seemingly random results before and following a halving suggests that the underlying factors driving price is not a shift in supply and demand dynamics.
However, market analysis is not everything. There may be simply not enough data to notice any particular pattern – the cryptocurrency industry is still quite young after all. There is also a matter of scale. Strix Leviathan has pointed at Bitcoin and Litecoin as the most concerned about halvings. Perhaps this process does not affect less known currencies, while the top ones may be significantly influenced by it? After all, such events create so much needed attention, which leads to increased interest.
So, what course of action the situation may take in the case of Litecoin? The price has already been affected by it – it grew significantly high this year, achieving $146 at the end of June. But after reaching that point, it slowly started to fall down in July, below the $100.
Let’s assume that the most optimistic predictions will come true. Rewards are halved, and people who are aware of it start buying. The price goes up and the miners, encouraged by a higher value of the single coin, are still maintaining their work. Everything goes with the plan – the market is regulating itself.
What if the system doesn’t work as it should be? What if the market doesn’t react to halving, and the miners don’t have the adequate compensation for their rewards cut in half? It might make them quit their job, which will slow the process of adding new blocks to the Litecoin blockchain. However, in proof of work currencies, fewer miners leads to lowering the overall difficulty of the mining process. It will facilitate the work for people who stay with Litecoin. The market will survive, but rather without a significant bull run.
Nevertheless, Litecoin halving is something definitely worth of traders attention. But how exactly will it affect the further situation of one of the most popular currencies? We shall soon find out.
Artykuł Litecoin Halving – What To Expect? pochodzi z serwisu Blockchain24.co | portal with cryptocurrency bitcoin & blockchain news.