Litecoin’s blockchain is set to undergo a mining reward halving in August this year, as it is programmatically designed to do so after every 840,000 blocks are mined or roughly once every four years.
The process is aimed at controlling inflation by reducing the rewards for mining on the blockchain from 25 coins to 12.5 coins and seems to have put a strong bid under the cryptocurrency.
Litecoin has scored gains in each of the previous four months – its longest monthly winning streak since August 2017. Prices rallied 3.8, 46.3, 31.15 and 22 percent in January, February, March and April, respectively, according to CoinDesk data.
Why does the halving matter?
Associating litecoin’s rally with the reward halving makes sense as the process results in reduced production of the cryptocurrency’s supply. Miners will be earning 50 percent fewer coins for every block mined after August and will be adding significantly fewer litecoins to the software’s ecosystem, possibly leading to supply deficit.
Markets are always forward-looking and tend to price in such demand/supply-altering events often times several months in advance.
Backing that argument is historical data which shows the price of litecoin had rallied sharply in seven months leading up to its first reward halving, which took place on August 25, 2016.
Litecoin’s Halving and Price History
Back then, LTC had bottomed out at $1.12 in January 2015 to print a high of $8.72 in July before falling back below $4.00 ahead of Aug. 25.
This time, the cryptocurrency bottomed out $22 in December and has surged by more than 250 percent ever since. The rally may not be over yet as the halving event is still three months away and traders who missed the bus in the first quarter may enter the market in the next few weeks, creating upward pressure on prices.
Also, the implication of a “halving” and its historical impact on price will start getting more attention as the event nears, potentially inviting more buyers to the market.
All said, events that get priced into the value of a traded asset well in advance of the actual date tend to experience a “sell the news” effect once the event has in fact taken place or slightly before it.
Case in point, this is what transpired in the few weeks leading up to litecoin’s first halving in 2015.
As the date approached, investors began to lock in profits by selling the digital asset after it topped out in July 2015, one month prior to the reward halving. The month of the halving itself, in fact, closed with litecoin’s price nearly 40% lower than when it started, further confirming investors lost interest in the cryptocurrency after the highly anticipated halving event had concluded.
After the supply cut, litecoin’s price trend remained sideways for nearly two years before surging to new all-time highs in 2017, potentially laying the blueprint for what is to come after its block rewards are halved once more.
Disclosure: The authors hold no cryptocurrency assets at the time of writing.
Litecoin image via Shutterstock; charts by Trading View