HomeServicesCompanyNews & InsightsCareersContactLogin
IntroductionWhat is Halving?Why does it matter?Impact on Litecoin during its previous halving eventOther currencies that have seen halving in the pastImplications on litecoin and other coinsConclusion
Friday, 2 August, 2019
The Digital Investor

Implications of Litecoin’s reward halving

On 5th August 2019, litecoin (LTC) is expected to go through its second halving, which will reduce its block reward from 25 LTCs to 12.5 LTCs per block. In this article, we look at historical examples and draw conclusions regarding reward halving impact on price, mining profitability, transaction fees and network hashrates. We also use this as a basis for understanding the potential impact of bitcoin halving, which is expected to take place next year.

Through our analysis, we observe that halving is an important event in both litecoin and bitcoin ecosystems with a direct impact on mining profitability. Impact on other factors such as price, transaction fees and network hashrate is not as direct as historical data do not show any clear relationship between them. We believe halving’s importance will increase going forward as inflation rates in both litecoin and bitcoin decrease over time.

Introduction

Among the many factors that drive cryptocurrency prices, monetary policy design plays a central role. The supply mechanism of bitcoin and litecoin are designed to create a pre-determined scarcity as there will be only a fixed number of coins that will be mined1.

From an investment point of view, two monetary features are important for any cryptocurrency. First, whether there is a maximum amount of currency to be issued or not as it defines the degree of scarcity. Second, the block reward (the revenue miners receive for validating transactions and securing the network) is important as it has to be large enough to cover the cost of mining. The price of the cryptocurrency in fiat (for example, USD) also plays a key role as the costs incurred by miners such as hardware and electricity costs – are priced in terms of fiat currency. Against this background, halving is very important for the sustainability of the ecosystem.

What is Halving?

In the context of cryptocurrency, halving refers to the reduction of the block reward by a factor of two after a pre-determined number of blocks have been mined. In the case of both bitcoin and litecoin, halving takes place after every 210,000 and 840,000 blocks respectively (i.e. approx. 4 years in both coins). Litecoin was created in 2011 based on bitcoin’s source code, and it shares a supply limit similar to bitcoin, as it also has a maximum total supply of 84mn LTCs that can be mined over time. Halving reduces the rate at which new coins enter into the ecosystem resulting in a decreased inflation rate2. The network difficulty, which is a measure of hard it is to mine the next block, adjusts with the changing hashrate3 of the network which keeps the coin supply in line with the predetermined inflation function4. Litecoin’s block reward started with 50 LTCs per block and has since halved to 25 LTC per block. The block reward is expected to halve further to 12.5 LTCs per block around 5th Aug 2019.

Exhibit 1: Litecoin Daily Inflation (annualised)

Source – Coinmetrics

Why does it matter?

Halving has an important impact on any proof of work based crypto asset. We see that it has a direct impact on factors that affect mining activities. These include:

  • Mining Profitability: A direct impact on mining profitability is seen as the block reward is reduced by 50% every four years. Miners will be able to generate fewer coins for the same hashrate, assuming that the price remains constant after halving.

  • Network Hashrate: A reduced block reward can turn mining activity into an unprofitable business for many miners, which may lead to miners closing their operations or switching to other profitable cryptocurrencies. In case a significant number of miners close their operations, the network will see a drop in hashrate. This can make the network more centralised if a disproportionate number of miners leave the network and therefore make the network less secure over time. However, an offsetting factor in light of a reduced hashrate is the reduced mining difficulty5. which can lower the cost of mining incentivizing miners to re-join the network

  • Price: If the difficulty re-adjustment results in a lower cost of mining, all else equal, the price of litecoin will be supported. However, if the cost of mining does not decrease after the difficulty re-adjustments, the price may come under pressure. Empirical data shows that Litecoin and Bitcoin’s price saw an increase in a 90-day period prior to halving, while no significant pattern is visible in a similar period post halving.

  • Transaction Fees: Historical data suggests that halving has little to no impact on transaction fees. Meanwhile, upcoming Layer 26 solutions such as the Lightning Network have further created alternatives for users and kept transaction costs low.

Impact on Litecoin during its previous halving event

Litecoin’s previous halving occurred on 26th August 2015. Its price saw a 60% increase during the 90 days prior to the halving event. Whereas, in the 90 days post halving, litecoin’s price stagnated, posting a marginal growth of 6%. (Exhibit 2). Mining profitability saw an increase alongside the pre halving price rally followed by a sharp decline of 50% as the block reward halved on 26th August 2015. In the post halving period, we see that the profitability stabilised at a slightly lower level compared to its pre-rally level.

Exhibit 2: Litecoin price and mining profitability around previous halving event

Source – CryptoCompare, Bitinfocharts

Historically, the impact of halving on hashrate has been limited. The hashrate dropped by approx. 15% around litecoin’s first halving but quickly rebounded back to its pre-halving level driven by a reduced difficulty, which reduced the cost of mining and therefore somewhat supported mining profitability (Exhibit 3).

Exhibit 3: Litecoin hashrate and mining profitability around previous halving event

Source – CryptoCompare, Bitinfocharts

As block rewards halve, miners are incentivized to validate transactions that generate higher fees. This can result in users paying more fees to decrease their transaction time and raising the aggregate transaction fees in the network. Historically, transaction fees have seen a small drop at the time of halving, whereas their share relative to daily earnings (block rewards plus transaction fees) has remained stable (Exhibit 4). Over the next three months, transaction fees saw a gradual increase.

Exhibit 4: Litecoin transaction fees around previous halving event

Source – CryptoCompare, Bitinfocharts

Other currencies that have seen halving in the past

Bitcoin has seen two-block reward halvings in the past, with its next halving expected to occur in May 2020. 90-days prior to bitcoin’s first halving its price saw a 15% increase whereas 90-day post-halving price increased by 152%. Mining profitability saw a 50% decrease as the block reward halved on 28th November 2012 but bounced back to its previous level as the price rallied. (Exhibit 5)

Exhibit 5: Bitcoin price and mining profitability (1st halving; 28th November 2012)

Source – CryptoCompare, Bitinfocharts

During its second halving Bitcoin saw a stronger pre-halving rally with a 55% price increase. However, its price started moving sideways in the post-halving period due to which mining profitability was unable to regain its previous level (Exhibit 6).

Exhibit 6: Bitcoin price and mining profitability (2nd halving; 29th July 2016)

Source – CryptoCompare, Bitinfocharts

Implications on litecoin and other coins

During the past 90 days, litecoin rallied to touch a yearly high of USD 141 and has since then corrected. Litecoin saw a net price increase of 23% in this period (Exhibit 7). The hashrate also saw an all-time high during this period (Exhibit 8). This increase in price and hashrate are in-line with historically observed halvings in both Litecoin and Bitcoin. Going forward, we note that as mining profitability decreases miners could move to other profitable networks. This will result in a reduced network hashrate and potentially higher hashing power concentration. However, according to recent market rumours an advanced version of mining hardware (ASICs) may be launched very soon. This could render litecoin mining more profitable compared to what the current mining equipment are able to achieve, by using less electricity. This could support the overall hashrate of the network.

On the other hand, the price action of litecoin in the post-halving period remains uncertain. Historical data suggests that price action has not been positive in every scenario (Exhibit 9). We believe transaction fees will not be affected by the upcoming halving as the use of layer two solutions has grown over time

Exhibit 7: Litecoin price and mining profitability

Source – CryptoCompare, Bitinfocharts

Exhibit 8: Litecoin hashrate and mining profitability

Source – CryptoCompare, Bitinfocharts

Exhibit 9: Price action around halving events (price rebased to 100 on halving date)

Source – CryptoCompare, Bitinfocharts

As litecoin’s mining profitability decreases over time, it will incentivize miners to consider merge mining7 (aka auxiliary proof of work mining) as an option and mine other cryptocurrencies along with litecoin. This will facilitate diversification and help miners spread their risk. One such example of merge mining is dogecoin (Exhibit 10). This is because dogecoin adopted merged mining which allows miners to mine both litecoin and dogecoin simultaneously without incurring any new hardware or electricity costs. We believe that other small proof of work coins might move towards merged mining to leverage the falling profitability of top crypto coins like Bitcoin and Litecoin. These developments have the potential to make blockchains more secure in the future.

Exhibit 10: 90-day rolling correlations of litecoin and dogecoin

Source – CryptoCompare, Bitinfocharts

Conclusion

We see that halving is an important event in both litecoin and bitcoin’s ecosystem, but its impact is not uniformly seen across all the related factors. Halving’s biggest impact is seen on the mining profitability, whereas the impact on other factors is not as direct. Therefore, no clear relationship is seen. We believe halvings importance will increase going forward as inflation rate in both litecoin and bitcoin will decrease.


1Mining is the process of adding transaction records to any proof of work based public ledger of past transactions. This ledger of past transactions is called the Blockchain.
2 Daily Inflation rate for a coin is calculated by dividing the number of coins mined in a day by the circulating supply (i.e. total number of coins that have been already mined).
3A hashrate in blockchain and cryptocurrency operations is defined as the amount of computational power deployed in a given period of time. Network hashrate refers to the total computational power of all active miners.
4 Bitcoin and Litecoin have fixed number of coins that can be mined. The supply is controlled by a pre-set code which determines the rate at which the coins enter the ecosystem. This gives us a clear idea of how inflation will react in future.
5Difficulty is a value used to show how hard is it to mine a new block in the blockchain. Higher the difficulty more computational power is required to mine the next block.
6Layer 2 solutions are used to scale payments, and to do off-chain computations. These solutions are built “on top of” the main chain and are also refers to as off-chain scaling solutions. Layer 2 to solutions are built to make the existing blockchain more scalable without changing its main code.
7Merged mining is the process of allowing two different crypto currencies based on the same algorithm to be mined simultaneously
Share:

Authors


Yves Longchamp
Head of Research
SEBA Bank AG
in
Rohan Misra
Research Analyst
B&B Analytics Private Limited
in
Ujjwal Mehra
Research Analyst
B&B Analytics Private Limited
in
Download pdf
Disclaimer

research@seba.swiss

Disclaimer

This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial investment or to participate in any particular investment strategy. This document is for distribution only under such circumstances as may be permitted by applicable law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction.

No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this document, except with respect to information concerning SEBA. The information is not intended to be a complete statement or summary of the financial investments, markets or developments referred to in the document. SEBA does not undertake to update or keep current the information. Any statements contained in this document attributed to a third party represent SEBA's interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party.

Any prices stated in this document are for information purposes only and do not represent valuations for individual investments. There is no representation that any transaction can or could have been effected at those prices, and any prices do not necessarily reflect SEBA’s internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by SEBA or any other source may yield substantially different results.

Nothing in this document constitutes a representation that any investment strategy or investment is suitable or appropriate to an investor’s individual circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own judgment in making their investment decisions. Financial investments described in the document may not be eligible for sale in all jurisdictions or to certain categories of investors. Certain services and products are subject to legal restrictions and cannot be offered on an unrestricted basis to certain investors. Recipients are therefore asked to consult the restrictions relating to investments, products or services for further information. Furthermore, recipients may consult their legal/tax advisors should they require any clarifications. SEBA and any of its directors or employees may be entitled at any time to hold long or short positions in investments, carry out transactions involving relevant investments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment itself or to/for any company commercially or financially affiliated to such investment.

At any time, investment decisions (including whether to buy, sell or hold investments) made by SEBA and its employees may differ from or be contrary to the opinions expressed in SEBA research publications.

Some investments may not be readily realizable since the market is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Investing in digital assets including cryptocurrencies as well as in futures and options is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may under certain circumstances occur. The value of any investment or income may go down as well as up, and investors may not get back the full amount invested. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. Tax treatment depends on the individual circumstances and may be subject to change in the future.

SEBA does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific investor’s circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of individual investors and we would recommend that you take financial and/or tax advice as to the implications (including tax) prior to investing. Neither SEBA nor any of its directors, employees or agents accepts any liability for any loss (including investment loss) or damage arising out of the use of all or any of the Information provided in the document.

This document may not be reproduced or copies circulated without prior authority of SEBA. Unless otherwise agreed in writing SEBA expressly prohibits the distribution and transfer of this document to third parties for any reason. SEBA accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this document.

Research will initiate, update and cease coverage solely at the discretion of SEBA. The information contained in this document is based on numerous assumptions. Different assumptions could result in materially different results. SEBA may use research input provided by analysts employed by its affiliate B&B Analytics Private Limited, Mumbai. The analyst(s) responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting market information The compensation of the analyst who prepared this document is determined exclusively by SEBA.

Austria: SEBA is not licensed to conduct banking and financial activities in Austria nor is SEBA supervised by the Austrian Financial Market Authority (Finanzmarktaufsicht), to which this document has not been submitted for approval. France: SEBA is not licensed to conduct banking and financial activities in France nor is SEBA supervised by French banking and financial authorities. Italy: SEBA is not licensed to conduct banking and financial activities in Italy nor is SEBA supervised by the Bank of Italy (Banca d’Italia) and the Italian Financial Markets Supervisory Authority (CONSOB - Commissione Nazionale per le Società e la Borsa), to which this document has not been submitted for approval. Germany: SEBA is not licensed to conduct banking and financial activities in Germany nor is SEBA supervised by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), to which this document has not been submitted for approval. Hong-Kong: SEBA is not licensed to conduct banking and financial activities in Hong-Kong nor is SEBA supervised by banking and financial authorities in Hong-Kong, to which this document has not been submitted for approval. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Hong-Kong where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”). Netherlands: This publication has been produced by SEBA, which is not authorised to provide regulated services in the Netherlands. Portugal: SEBA is not licensed to conduct banking and financial activities in Portugal nor is SEBA supervised by the Portuguese regulators Bank of Portugal “Banco de Portugal” and Portuguese Securities Exchange Commission “Comissao do Mercado de Valores Mobiliarios”. Singapore: SEBA is not licensed to conduct banking and financial activities in SIngapore nor is SEBA supervised by banking and financial authorities in Singapore, to which this document has not been submitted for approval. This document was provided to you as a result of a request received by SEBA from you and/or persons entitled to make the request on your behalf. Should you have received the document erroneously, SEBA asks that you kindly destroy/delete it and inform SEBA immediately. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Singapore where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”). UK: This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product.

SEBA is not an authorised person for purposes of the Financial Services and Markets Act (FSMA), and accordingly, any information if deemed a financial promotion is provided only to persons in the UK reasonably believed to be of a kind to whom promotions may be communicated by an unauthorised person pursuant to an exemption under the FSMA (Financial Promotion) Order 2005 (the “FPO”). Such persons include: (a) persons having professional experience in matters relating to investments (“Investment Professionals”) and (b) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 49 of the FPO (“High Net Worth Businesses”). High Net Worth Businesses include: (i) a corporation which has called-up share capital or net assets of at least £5 million or is a member of a group in which includes a company with called-up share capital or net assets of at least £5 million (but where the corporation has more than 20 shareholders or it is a subsidiary of a company with more than 20 shareholders, the £5 million share capital / net assets requirement is reduced to £500,000); (ii) a partnership or unincorporated association with net assets of at least £5 million and (iii) a trustee of a trust which has had gross assets (i.e. total assets held before deduction of any liabilities) of at least £10 million at any time within the year preceding the promotion. Any financial promotion information is available only to such persons, and persons of any other description in the UK may not rely on the information in it. Most of the protections provided by the UK regulatory system, and compensation under the UK Financial Services Compensation Scheme, will not be available.

© SEBA / Grafenauweg 6, 6300 Zug, Switzerland

Research

more
Research
Are crypto-assets suitable for institutional investors?
07 November, 2019
For years, crypto-asset has been a confidential asset class for non-institutional investors. However, we observe growing “institutionalisation”. In this issue of The Digital Investor, we give a broad overview of the state of the institutionalisation process to assess whether it has reached a level of development that is advanced enough to attract institutional investors.
Read more
Research
Hello, crypto world!
24 October, 2019
Blockchain 101: A simple analogy with a famous board game. Whether you play chess or not, this publication is for you. We invite you to discover the crypto world through the game of chess. Don’t be afraid. No prior knowledge in either blockchain or chess is required.
Read more
Research
Switzerland tackles stable coins
17 October, 2019
The Swiss Financial Market Supervisory Authority (FINMA) published guidelines on stable coins (including Libra), thereby increasing regulatory certainty around these type of projects. The Swiss National Bank (SNB) assessed stable coins from a macroeconomic perspective, while the G7 handed off work on regulatory issues to the Financial Stability Forum (FSB)
Read more

Join us as we redefine finance.

Contact us
seba

SEBA Bank AG
Grafenauweg 6
6300 Zug
Switzerland

ServicesCompanyNews & InsightsCareersContact
Contact us
© 2019 SEBA Bank AG