One of Litecoin's (LTC) rules embedded in its code is soon about to reduce the rewards for miners who ensure the processing of transactions on the blockchain. Litecoin's the fourth largest cryptocurrency in the world by total value.
In around five days, LTC will undertake a reward halving. The aim is to conserve the purchasing power of the cryptocurrency. The reward for mining Litecoin is currently 25 litecoins per block ($2,500). This will drop by half to 12.5 litecoins per block ($1,250) on Monday, August 5, 2019.
After this point, there will be fewer litecoins added to the market. The process is comparable to the measures central banks initiated in the past - such as hikes in the interest rates across the world over when trying to combat high inflation. Investors could be tempted to grab litecoins before the event occurs.
While the crypto might pick up in the next few days, huge gains seem unlikely given that the price action in the last two quarters suggests that the impending cut in supply has been factored in already by shrewd traders.
The cryptocurrency ended the first quarter of 2019 at $61, having traded at $30 at the start of the year. The sum represents over a 100% gain - the best performance in the first quarter on record for LRC.
LTC also eked out considerable gains in the first quarter despite bitcoin's (the most significant cryptocurrency) smooth action. In effect, LTC entered into a bullish market much before bitcoin went from a bearish trend to a bullish one on April 2nd, with a big jump to $4,236. In June, the prices continued to reach highs of more than $140 before receding to $80 in July.
There has also been a sharp rise in LTC's non-price metrics from mid-December, with new record highs being hit multiple times throughout the last few months. Indeed, computing power or hash rate dedicated to crypto mining increased to 523.81TH/s on July 14th, which is an increase of 258% from the lows in December at 146.21TH/s.
The drop to $80 reminds us of the action happening in the months leading up to the previous halving of the reward, which occurred in August 2015. Prices went down to $1.12 back then in January and then reached $8.72 in the July before a recession to $2.55 by the August.
Following the halving, the prices continued to be trapped in a relatively narrow range between $2.50 and $5.50 before a surge over a year later in April of 2017.
If we use history to guide us, then Litcoin might trade in sideways maneuvers after the reward halving next week, unless bitcoin heads toward record heights of $20,000.
The profitability from mining is also likely to drop 50% with the rewards as the mining difficulty rarely immediately adjusts. The mining difficulty measures how difficult it is to add to the blockchain and maintain it. Some miners might shift to different blockchains, and this, in turn, could lead to a reduction in the hash rate.
This scenario could, however, tick higher in the coming months due to the inflation rate drop to 4% from the present 8.4% yearly likely being good for the price of LTC, which would make up for the reduction in the profitability of mining LTC.
Also noteworthy is the drop of 15% in the hash rate around the time of the previous halving, right before the subsequent rebound in the two weeks after, so say Binance Research.