With just one day to go until Litecoin’s (LTC) next halving event, Cointelegraph sets out all you need to know about the cryptocurrency’s reduction in block rewards. In spite of their reputation for creating price hikes, the lead up to the halving has witnessed a 25 percent decline in valuation over the last month.

What is halving?

Halving is a process that occurs when the mining reward for a cryptocurrency is reduced by 50%. Miners receive crypto rewards for solving problems that create each new block on a given blockchain. The rewards differ for each cryptocurrency. With Litecoin, miners are currently awarded 25 coins per block. After Aug. 5, miners will only receive 12.5 Litecoins per block.

Litecoin rewards halve every 840,000 blocks, a process that occurs every four years. The block speed for Litecoin is roughly 2.5 minutes, with around 576 blocks generated per day. One of the key factors to take into account is that, according to the coding behind cryptocurrencies such as Bitcoin (BTC) and Litecoin, only a certain amount will ever be mined. This distinct characteristic sets it apart from fiat currencies, which can theoretically be printed infinitely.

Although it’s difficult to say when the final Litecoins will be mined, the Litecoin Foundation estimates that it will be around 2142, when the maximum of 84 million Litecoins will be reached. As of press time, there are 62,983,450 Litecoins in circulation, representing 74.93% of all Litecoins that will ever be mined. This leaves roughly 21 million coins left to be mined up until 2142. Comparatively, it’s estimated that the final few Bitcoins (BTC) will be mined around 2140.

Halvings are closely followed by investors, as the consequent reduction in mining rewards affects the profitability. Accordingly, this has a knock-on effect on the price. For investors, this can be a mixed bag. According to the theory of supply and demand, halvings should drive up the price of the cryptocurrency. As they receive fewer coins per block solved, miners stop producing them until the work once again becomes profitable. As fewer coins enter circulation, the price consequently goes up, as demand — in theory — will overtake the supply. Although this sounds like a sure-fire win for investors, halvings can bring about even greater instability to an already volatile market.

Previous halvings have stoked investor interest, and the upcoming Litecoin event is no exception. According to Google Trends, searches for “Litecoin halving” peaked between June 9 and June 15, although data shows that this trend is once again increasing.

Searches for “Bitcoin halving” on Google are typically more numerous than entries for Litecoin, although this trend has reversed as of July 30.

What could happen?

In the time leading up to the halving, miners ramp up operations to maximize their returns until the whole process becomes unprofitable. Miners need to invest in powerful, specialized equipment to take on the computing challenges required for creating blocks. As the difficulty of mining blocks rises, so do electricity costs. Mining is no longer a game for individual hobbyists, with even the biggest mining farms struggling to remain profitable during the so-called crypto winter of 2018. Mining is now a big business, and businesses need to make a profit. So, when profitability falls, activities tend to cease.

The fact that miners will feel the heat after the halving is no secret, with Litecoin creator Charlie Lee predicting that many will shut up shop after Aug 5. Lee told Australian crypto news site Mickey that halving the block rewards by 50% always has an impact on the Litecoin mining ecosystem:

“When the mining rewards get cut in half, some miners will not be profitable and they will shut off their machine. If a big percentage does that, then blocks will slow down for some time. For litecoin it’s three and a half days before the next change, so possibly like seven days of slower blocks, and then after that, the difficulty will readjust and everything will be fine.”

Despite the commonly accepted theory that a decrease in supply results in a corresponding increase in demand, Lee suggested that market sentiment also plays a role in ramping up the price:

“In terms of the price, the halvening should be priced in because everyone knows about it since the beginning. But the thing is people kind of expect the price to go up. So a lot of people are buying in because they expect the price to go up and that’s kind of a self-fulfilling prophecy. So, because they’re buying in, the price does actually go up.”

After Litecoin’s 2015 halving, the coin peaked in July of that year before losing nearly 50% of its value by the time of the reward reduction, culminating in a decrease of 75% in the aftermath, Mickey reports. Naeem Aslam, chief market analyst at ThinkMarketsFX, told Cointelegraph via email that reducing block rewards for miners is an effective filtering process and agreed that the effect on the price is usually positive:

“Reducing the incentive for miners is good for LTC because only serious people will remain in the space. As for the price action, it is difficult and it depends a lot on the sentiment but usually this kind of action is positive for the price.”

If the price bombs following the halving, the network hash rate will tail off as mining begins to shut down, leaving only the largest mining farms operational. Once the hash rate drops below a certain point, the mining difficulty will adjust itself and smaller miners may be able to begin mining once again.

Supply and demand: Experts weigh in

Although halving events are widely considered to result in a price hike for the given cryptocurrency, market experts do not foresee any dramatic changes in valuation. Mati Greenspan, a senior market analyst at eToro, told Cointelegraph that halving events are usually priced in before they actually happen:

“It seems to be the case here as well. Litecoin has outperformed the rest of the market during this year's rally and some say that it was a root cause of the upward momentum in the first half of this year. It's difficult to say how or even if the price will react to the event in the short term. In the long term, reduced supply supports higher prices all else being equal.”

Renowned crypto trader and technical analyst Crypto Rand also agreed in email conversations with Cointelegraph that the halving event has already been priced in:

“I don't think the halving event will have much impact on Litecoin price, it's already priced in since one month I would say. LTC is looking pretty solid here. It just broke up the local downtrend channel after bouncing on the key $88 range support. If the downtrend of volume finally comes to an end I'm expecting a rise on the price back to $105-$110. Right now looks like a solid option among the rest of big caps.”

For Aslam, those trying to jump on the halving gravy train are already too late:

“The most important factor to remember is that these kind of planned events are already fully priced in and traders have already positioned themselves for this. Running up to the event, it is not usually wise to participate in that move because you are already too late for the party. Therefore, smart money always buy the rumour and sell the news.”

Greenspan predicts that there won’t be many surprises in mining activity, due in part to Litecoin’s scrypt algorithm:

“Litecoin's scrypt algorithm is pretty unique so the hardware used to mine it is not easily adaptable to mining other tokens. Therefore it doesn't have quite the same of competition over hashrate that some of the other cons have. My feeling is that LTC miners have had ample time to prepare for the halving so we shouldn't see any major changes.”

When asked about what investors holding LTC should be doing, Greenspan had advice:

“Holding. But more importantly spending. Litecoin's value proposition specifically involves being a more durable token for making payments. The more people use it for this purpose, the stronger the network gets.”

Some members of the crypto community are commenting that the Litecoin halving can be viewed as a test run for the upcoming midyear 2020 BTC halving and that we can consequently expect similar results. For Greenspan, the comparison is sound, although he warned that results will not be identical:

“The market has matured a lot since the last Bitcoin and Litecoin halvings. Though we couldn't possibly expect a mirror reaction, the LTC halving should give us some indication of what to expect when BTC does the same next year.”

Crypto Rand is not so sure, however, stating that investor understanding and even awareness of Litecoin juxtaposed to Bitcoin is incomparable:

“I don't think LTC halving can work as test for Bitcoin, I would say 95% of the traders/investors are not aware of the halving on LTC or they don't know what means. The coverage for BTC it's and will be a fully mainstream event, everyone will be aware of it.”

Strix Leviathan says halving profits are a myth

A blog post published on July 21 by institutional-grade algorithmic investment management platform Strix Leviathan reported that cryptocurrencies do not outperform the market in the months leading up to and following block reward reductions.

The report found that the supply and demand theory, while “certainly feasible as a logical theory,” does not result in a rapid increase in price. Per the report, Strix Leviathan analysts found that LTC outperformed the market twice prior to a reduction in block rewards, yet fell to the bottom 25% of the market in the ensuing six-month period. The report also postulates that the performance of a crypto asset both in and out of halving periods are more or less the same:

“What we find is that the return distribution of an asset’s halving periods versus the return distribution outside of its halving periods reveals that they are statistically the same at a 99% confidence level. In other words, we did not find evidence that a halving event results in abnormal pricing action and we are dealing with a circumstantial illusion. It appears more likely that the return behavior before, during, and after a halving coincides more with increasing levels of speculation than with an underlying shift in sell side pressure.”

Merged mining could mitigate block reward reductions

A report published by Binance Research, an arm of major crypto exchange Binance, found that the impact of halvings for both BTC and LTC miners could be mitigated by merged mining. Binance researchers analyzed Charlie Lee’s prediction that many miners would have to halt operations and looked into how merged mining could help keep miners on-board even after rewards have been reduced.

Merged mining uses the work done on a parent blockchain and spreads it across other smaller “child blockchains” by using auxiliary proof-of-work (AuxPoW). The three most prominent examples of merged mining are the Litecoin-merged Namecoin (NMC), Bitcoin-merged Dogecoin (DOGE) and Myriadcoin (XMY), a cryptocurrency merged with both BTC and LTC.

The report theorized that merged mining could help mitigate the impact of reward reductions by future block rewards scheduled for both Litecoin and Bitcoin. Binance researchers also reported that smaller chains could incorporate AuxPoW in future to support greater network security and reduce the need for an independent mining operation. The report did, however, find some potential shortcomings. Researchers said that miners may not turn to merged mining due to the risk of operational costs when supporting child blockchains and potential declines in the market price.

The report cites Dogecoin as the most successful examples of merged mining, which adopted the model in August 2014. After the switch, the coin’s mining hash rate skyrocketed 1,500%. The report also found that, as of July 2019, 90% of Dogecoin’s total hash rate is sourced from Litecoin mining pools.