In its latest report, Binance research tackles the upcoming Litecoin halving scheduled for August 6th, this year.

Created in 2011 by Charlie Lee by forking most of the Bitcoin’s source code with a few key differences in terms of hash function and reduced block times, in the similar fashion as the leading cryptocurrency, the block reward reduction of Litecoin is scheduled to decrease over time.

Litecoin Supply to be Reduced

The block reward of Litecoin is halved every 840,000 blocks that is every four years. With this halving, the current block reward that is set at 25 LTC per block will be subsequently decreased to 12.5 LTC per block.

The report further jumps into the implications of halving for any POW cryptocurrency which is very important including mining profitability that would be cut in half and a potential decrease in miners that could also lead to a higher risk of 51 percent attack if the hash rate decreases.

Halving events to some extent are similar to the predefined change in digital central banking policy, notes the report, due to the fact that they impact the inflation rate of a cryptocurrency by reducing the future supply increase.

Coming onto the inflation aspect, its supply is around 8.4 percent per year currently which will drop to ~4% after halving.

In the meantime, they also point out other factors like lack of hedging markets for Litecoin which is special to the 6th largest cryptocurrency that means profitability is highly dependent on prices.

Moreover, revenues from transactions fees are insignificant compared to block rewards. Given the fact that Litecoin has a much lower on-chain number of transactions than Bitcoin and its transaction fees only represent less than 0.12% of the mining block reward from Litecoin, it would bring some issues.

What Does History Tell Us?

Taking a look at the Bitcoin halving, it would be having its third one in May 2020. In the first halving, the post-halving rally helped partially in offsetting the nominal decrease in mining profitability. Whereas in the second halving, there have a general decrease in block profitability but initial price rally didn’t compensate for this loss.

So, on this basis, there are a few scenarios. The price rallies before stabilizing at a new high is the first one and LTC has been already up 200% YTD. Now the second one is increase in the hash rate before halving before the mining reward decrease and it already has as LTC hash rate is on ATH.

Another possible scenario is mining profitability adjust as miner exit the market which could be due to miners switching to more profitable coins in which case reduced competition would compensate for the loss of profitability but it also increases the centralization of Litecoin leading to a great risk of 51% attack.

At last, a permanent drop in mining profitability could also happen but it didn’t happen after the last fork, so can't be predicted as of yet.

500% Spike in LTC Price Over 3-Month Period

Across Litecoin’s 8 year history, it had only single halving when the price increased from $1.5 USD to more than $3 USD after halving. The overall volatility so the cryptoasset increased in the months prior to the event.

“Litecoin’s previous halving was preceded by a large price rally with an increase by more than 200% (and spiking by over 500% over the 3-month period before).”

LTC is already up 200%, could this mean Litecoin is gearing up for another 500% increase?

As for the consequences, last time there has been a drop in miner participation as hash rate dropped about 15 percent only to rebound in the two weeks following the halving. This drop was compensated by the price rally.