The crypto markets couldn't offer up a clearer example of supply and demand -- and the impact on prices -- than they did this week.
A strong upward move in cryptocurrency Litecoin on Monday, triggered by an event called "halving," led to sympathetic moves in other cryptocurrencies including bitcoin as investors were reminded that bitcoin, too, is set to see its mining rewards change.
Litecoin's reminder that bitcoin miner rewards, too, will halve accompanied a "risk off" trade that powered bitcoin higher on the back of global turmoil and China's latest fiat currency devaluation. Cryptocurrencies, with a fixed supply denominated in fiat currency prices, typically benefit from fiat currency devaluations and the news from China fueled a predictable bitcoin bump.
At the core of the rise, though, top-ten cryptocurrency Litecoin successfully completed what insiders call a "halving" on Monday, with Litecoin soaring by more than 10% on the news before partially retracing. Bitcoin flirted with the $12,000 threshold on Monday, while on Tuesday, Litecoin pulled back from the $100 mark and bitcoin fell slightly.
What is "halving" -- also termed "halvening?" For the uninitiated, so-called "Proof of Work" cryptocurrencies incentivize cryptocurrency miners to discover the next block of transactions on a blockchain and confirm they took place. It's akin to precious metals mining where returns diminish as the same effort yields progressively less metal. Cryptocurrency "miners" -- it turns out, face those same headwinds to supply and demand.
Cryptocurrency "miner" rewards periodically diminish over time, with Litecoin's reduction kicking in at block 1,680,000 earlier on Monday, halving the reward from 25 to 12.5 LTC per block. As one market exchange, Binance Academy, explains, "the halving ensures that a crypto asset will follow a steady issuance rate until its maximum supply is eventually reached."
Litecoin's halving attracted significant interest within the crypto community, particularly from speculators eager to gauge whether LTC's corresponding price movement is mirrored by BTC when it undergoes it's scheduled to undergo its own halving next year.
Pricing in the Move
Common consensus holds that slashing mining rewards in half reduces the sell-side pressure from miners, who are obliged to offload freshly minted coins onto the market to cover their costs. In anticipation of this occurring, traders are prone to load up on the cryptocurrency, leading to the assumption that the reduced selling pressure that ought to occur post-halving is already "priced in."
In the case of Litecoin, the evidence would suggest that this is the case. The coin is up over 200% for the year to date, with a 165% "hashrate"-- or miner output -- increase for the same period. As more miners compete to find the next block, the network's hashrate -- the combined processing power of all mining machines -- increases.
Correlation does not equal causation, of course, and there are plenty of other non-mineable crypto assets that have also recorded a bumper year. Nevertheless, Litecoin's impressive rally in late June, which saw prices surpass $140, has been attributed to the much-hyped halving. A similar trend for bitcoin leading into its halving event in 2020 would likely see the cryptocurrency reach a new all-time high.
"The reason for Litecoin's price increase appears to be speculative, as the reward halving has little effect on the stock-to-flow ratio," explained cryptocurrency trading firm RSK CEO Diego Guiterezza. "If anything, it increases the relevance of transaction fees in mining profitability, and reminds us that focusing on adoption and scalability is more important than ever."
Brothers in Arms or Bitter Enemies?
In an interview with Cointelegraph ahead of the halvening, Litecoin founder Charlie Lee insisted that Litecoin and bitcoin complement one another, adding: "A lot of people I know, they own bitcoin and Litecoin, and they use bitcoin for large transactions and Litecoin for small transactions...when bitcoin fees are high, Litecoin becomes very useful." Litecoin's faster block times -- two minutes versus bitcoin's 10 minutes -- also make it better suited to rapidly moving capital in and out of exchanges.
Despite these attributes, Litecoin seems cursed to forever live in the shadow of bitcoin. Even on Monday, on what should have been LTC's day, it had to play second fiddle to BTC, which stole the show with an 8.5% gain according to data from Coincodex, with LTC and EOS tied in second place, out of the top 10 crypto assets by capitalization, recording gains of 7% apiece. While the price of Litecoin climbed on Monday, the same cannot be said of its mining profitability. As the halving kicked in, the profitability of mining LTC dropped from $2.60 per GHz to under $2.
With Libra's payment currency on its way, medium of exchange coins such as Litecoin may face greater challenges than a rampant bitcoin capturing most of the market (BTC's dominance over the rest of the crypto market now stands at 68%, its highest level since January 2017 according to CoinMarketCap).
Regardless of what the future may hold for Litecoin, its successful halving and the rally that preceded it augur well for bitcoin over the coming months.
The author holds stock in investment holding company, Leucadia (Jeffries), and remains a partner in an emerging-technology fund. He holds no positions in cryptocurrencies nor in any companies that invest in them.