Litecoin Down 6.7% After Halving is Complete, Here’s Why
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Litecoin Down 6.7% After Halving is Complete, Here’s Why

As a lightweight copy of Bitcoin, Litecoin underwent its 3rd halving event on August 2nd.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

In the aftermath of the block reward getting sliced from 12.5 LTC to 6.25 LTC, Litecoin’s price promptly took a 7% tumble within a day. Litecoin is now three times less gainful than Bitcoin’s year-to-date performance, at only 25% value added. Is this also indicative of Bitcoin’s halving narrative, or is Litecoin a category of its own?

How is Money Valued?

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As we have seen with inflation woes for the last two years, currency supply is critical to money receiving the lauded attribute ‘sound money.’ When the Federal Reserve increased the M2 money supply by 35%, breaking all historical records, the dollar’s value began to dilute, manifested as a 40-year high inflation rate.

In other words, the value of money goes down if it is not met with demand. After all, if people perceive that the unit of information (money) improperly values their goods and services, it will be less valuable. In extreme cases, hyperinflation can make money worth less than the paper printed on, as with Venezuelan bolivars. 

This is why Bitcoin and Litecoin, dubbed digital gold and silver, respectively, have halving mechanisms. In contrast to fiat currencies, which can be arbitrarily tweaked, LTC and BTC have predictive and preprogrammed supplies at 84 million LTC and 21 million BTC.

Halvings determine the rate at which new coins are added into circulation by cutting the rewards for miners in half. For instance, before the first Bitcoin halving in November 2012, BTC had an enormous inflation rate of 26.77%.

Image courtesy of woobull.com via glassnode

As evident, Bitcoin’s follow-up halvings have been inversely proportional to Bitcoin’s price. This is expected as scarcity increases value if there is a demand to match it.

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Halvings’ Diminishing Impact

Bitcoin’s inflation rate is at 1.74%, below the Fed’s ideal target for the dollar. Litecoin’s inflation rate is higher, but not by much, at 3.66%. After another 840,000 blocks are mined, Litecoin will halve for the fourth halving in the summer of 2027.

However, with double-digit inflation rates behind Litecoin and Bitcoin, the halving effect on their prices becomes less pressing. These tiny percentages are no longer sufficient to offset market conditions that now play a pivotal role in determining their value.  

More precisely, the perception of their value.

Too Much Sound Money?

The existence of two digital sound moneys, Litecoin and Bitcoin, represents demand dilution itself. As non-governmental digital currencies, they both face legitimacy barriers for mainstream adoption.

This means that the demand pool is already low, to begin with. Litecoin and Bitcoin will receive the price determined by the fiat outflow from that pool. However, of the two, Bitcoin is perceived as more valuable based on several factors:

  • More known and ‘legit’ as the cryptocurrency originator.
  • Drastically more secure with unparalleled mining computing power, guarding against malicious attacks.
  • Lower total supply, at 21 million BTC vs 84 million LTC. 

Furthermore, the ‘lite’ in Litecoin is losing relevance regarding its energy-efficiency appeal. When Blackrock filed for Bitcoin ETF, that signified Larry Fink’s reversal on Bitcoin’s carbon footprint and energy waste. The latest KPMG report on Bitcoin’s ESG ranking checks all the green boxes.

“Bitcoin miners are identifying new and creative ways to source their power which has also resulted in the reduction of methane that enters the atmosphere.”

The report also notes that Bitcoin is the least used in money laundering of all cryptocurrencies, including stablecoins. Graphs like these go a long way in crafting laws for regulating cryptocurrencies.

The concentration of money laundering by digital asset type, image courtesy of KPMG Advisory.

Litecoin’s ‘lite’ aspect is also undermined by Bitcoin’s Lightning Network scaling solution, offering even lower transaction fees at near-instant speed. For these reasons, Litecoin’s next halving is likely to be even less impressive, driven by speculation only for the price to fall immediately after. 

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Do you think Litecoin will become a minor alternative, much like Diet Coke? Let us know in the comments below.