Despite many arguing that the 2019 block reward halving will decimate its price, Litecoin managed to remain relatively stable. According to the latest Coin Metrics research, there could be several explanations for this, but it might take another year before we realize the full effect the halving had on the market.
Litecoin’s is a case study for other block reward halvings
With Bitcoin‘s May 2020 halving getting closer, the potential impacts of the 50 percent reduction in block rewards are becoming increasingly important in the crypto industry. According to the latest Coin Metrics research, the small number of block rewards the industry has seen and their “infrequent nature” made making any strong predictions almost impossible.
Nonetheless, Kevin Lu and the Coin Metrics team used Litecoin’s August halving to evaluate two of the most common block reward halving theories. The first theory proposes the following—block reward halvings have little effect on the said coin’s price as they are already priced in.
This is due to the fact that halvings are always mandated by the protocol, and are therefore known to all market participants. And since everybody is aware of the halvings, the efficient market hypothesis (EMH) states that its potential consequences are fully reflected in the coin’s price. That’s why there is no immediate reaction in the price of a coin immediately after the halving.
Litecoin’s performance throughout 2019 supports this theory. The market anticipated the halving and bid LTC‘s price in advance to reduce the immediate impact on its price. Litecoin jumped 350 percent in the first six months of 2019 most likely due to this phenomenon, outperforming every other cryptocurrency except Binance Coin (BNB).
The coin’s poor performance in the second half of the year could be explained by traders unwinding their positions, Coin Metrics reported.
Could miner-led selling pressure be what pushes prices up after halvings?
The Coin Metrics report used Litecoin to illustrate the example. Namely, as Litecoin’s annualized supply issuance was running at 8 percent prior to the halving, which means that at current prices miner revenue was roughly $200 million per year. This is equivalent to $600,000 in natural selling pressure every day, as miners are expected to sell nearly all of their rewards for fiat to cover costs.
Following the August halving, Litecoin’s annualized supply issuance was slashed to just 4 percent, which meant that the daily selling pressure was around $300,000.
“Such a drastic reduction in compelled selling pressure should be supportive to prices going forward,” the report found.
However, while promising, this theory doesn’t apply to Litecoin and it most likely won’t apply to Bitcoin, either. With no identifiable price rise following the LTC’s August halving, many disputed this idea saying the selling pressure from miners accounted for a small amount of trading volume. Compared with trading volumes seen on exchanges, the $300,000 reduction in daily selling pressure from miners is most likely insignificant.
Nonetheless, Coin Metrics found that both of these theories deserve “continued study.” With Bitcoin, Bitcoin Cash, Bitcoin Cash SV, and ZCash all scheduled to experience a block reward halving next year, it might take another year or more before the market sees the true impact of Litecoin’s halving.
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