What clues does Litecoin's halving on Thursday provide for Bitcoin's halving market?

By Greg Cipolaro, Head of Global Research, NYDIG Compiled by: WEEX

Main points of this article:

• Litecoin will usher in its third halving this week. By observing Litecoin, it can provide a reference for Bitcoin's performance during the halving process.
• Before and after this halving, the performance of Litecoin has some similarities with the previous halving, but it also shows new signs.
• Litecoin’s behavioral changes during the halving could have implications for Bitcoin, some of which we have already noticed as the asset and investor base matures.

Bitcoin’s cyclical price action, one of the unexplained mysteries of cryptocurrency investing, is the bull-bear cycle that repeats every 4 years around the block reward halving. On the surface, these repeating patterns violate even weak forms of the Efficient Market Hypothesis (EMH), which states that future price movements are unaffected by historical price information, but for whatever reason, cryptocurrencies repeat themselves over and over again This pattern.

Two Interpretations of Periods

There are two plausible explanations for these patterns in the market. First, Bitcoin acceptance continues to grow, driving the value of the entire network and the price of Bitcoin itself, but the human psychology of fear and greed associated with this disruptive technology has created extreme deviations from this growth trajectory. It is not uncommon for new technology innovations to go through periods of hype, as well described by both the Gartner Hype Cycle and Carlota Perez's Technological Revolution Framework; however, Bitcoin is the only one we know of that goes through these cycles repeatedly Technology.

WEEX Note: Gartner Hype Cycle (Gartner Technology Hype Cycle) is a model proposed by the research and consulting company Gartner to describe the development process of new technologies. The model divides the development process of technology into different stages, including technology observation, hype, disappointment, understanding and maturity. Among them, in the stage of hype, the technology is usually over-promoted and overestimated, and its advantages and potential applications are often exaggerated. In the next stage of disappointment, because the actual application is not as expected, the technology may encounter a certain degree of criticism and doubt.

Carlota Perez's technological revolution framework is a theoretical framework proposed by economist Carlota Perez to describe the impact of technological revolution on the economy and society. According to this theory, a technological revolution includes an explosion period, a rapid expansion period, a bubble period, a contraction period and an establishment period. Among them, during the bubble period, emerging technologies usually attract a lot of attention and investment, and the market enthusiasm is high, but then there may be a certain degree of market adjustment and decline.

Back to the text, another explanation for the market’s 4-year cycle of cryptocurrencies is that the price of Bitcoin is determined by human factors because it does not generate discountable cash flows, so there is almost no standard for measuring the value of this asset. And these human players look for a price pattern to guide future movements and unconsciously reproduce past price patterns.

Litecoin has its own halving cycle

Whatever the explanation for these recurring patterns in Bitcoin, it is not the only crypto asset with recurring patterns. Launched in 2011, Litecoin has some similar economic variables to Bitcoin, except it either multiplies or divides by 4 (capped supply is 84 million instead of 21 million, and produces one every 2.5 minutes instead of 10 minutes on average) new blocks, halving every 840,000 blocks instead of every 210,000 blocks), has experienced its own unique price repeating pattern around the reward halving.

This week (expected on August 3, WEEX Weike Note), Litecoin will usher in the third halving in its history (Bitcoin plans to halve for the fourth time at the end of April next year), although Litecoin's Price cycles are very different from Bitcoin, but we wanted to see how Litecoin’s cycle behaved and how it changed, which might be instructive about how Bitcoin cycles might change going forward.

The Litecoin halving cycle is characterized by a price bottom 7-8 months before the halving (around the trough of Bitcoin's 4-year cycle), followed by a sharp rebound, often outperforming Bitcoin, until the actual halving. The price peaked 1-1.5 months before the half. Litecoin will then fall into a new cycle and find a new bottom sometime after the halving.

Therefore, the halving cycle of Litecoin is an expected cycle, and the price of LTC will experience troughs and peaks before the halving event. This is in contrast to Bitcoin, which only peaks in price after the halving occurs.

The halving period of LTC is different from that of BTC

Litecoin usually outperforms Bitcoin early in halving

During the first phase of the halving cycle, Litecoin generally outperforms Bitcoin, as the chart below shows. Litecoin typically bottoms alongside Bitcoin, but has outperformed Bitcoin in the months leading up to the halving.

LTC usually outperforms BTC before halving, Litecoin has been quieter this cycle

Looking at the data behind Litecoin’s halving cycles, there are two important takeaways — the duration of the cycle remains consistent, but the peak amplitude decreases with each successive cycle.

The first is the duration of the cycle, as shown in the chart below, there is a remarkable consistency in the timing of the trough, which is 223 - 234 days before the halving date. The same goes for the timing of the peak, which occurs 32 - 47 days before the halving.

If we look at returns over a halving cycle, from trough price to peak price, we notice a consistent trend that returns are decreasing. In the first two halving cycles, the returns from valley to peak were relatively close, 550% and 505% respectively. However, the current cycle's trough-to-peak price return has fallen sharply, less than 75%.

This is even more evident if LTC-BTC (the Litecoin price denominated in Bitcoin) is used to compare with the Bitcoin price. The previous two halvings, Litecoin outperformed Bitcoin by a large margin, as indicated by the LTC-BTC trough-to-peak returns. However, even though Litecoin gained nearly 75% ahead of its third halving, it still underperformed Bitcoin at its price peak.

In November last year, Litecoin did experience a brief period of high light when it rebounded from a low point and outperformed Bitcoin by a large margin. It seems that another halving cycle has begun. But that excess return quickly ended, peaking in the third week of November. Since then, Bitcoin has outperformed Litecoin, and while Litecoin's absolute price (in USDT terms, WEEX Weike Note) peaked, LTC-BTC relative price fell from trough to peak.

Why is this important to Bitcoin?

You might be wondering why most of our research this week focuses on a little-known phenomenon, a token that is rarely mentioned today (but is still a top 10 coin by market cap, regardless of stablecoins ). The reason is that the Bitcoin halving will come in less than a year (expected on May 9, 2024, WEEX notes), and investors are looking for clues to Bitcoin's price performance during the halving. Observing Litecoin’s price performance during successive halving cycles may tell us something about how Bitcoin will behave during halving cycles.

In fact, we have noticed many times that the rate of return from the trough to the peak of the Bitcoin halving cycle, and the retracement rate from the peak to the trough, are weakening over time, that is, the high is lower and the retracement The magnitude is smaller. Litecoin also seems to be showing this trend, especially during this round of halving. Therefore, there is reason to believe that this trend will continue as Bitcoin enters a new halving cycle.

Of course, past performance is no guarantee of future returns, so while we expect these cycles to continue to repeat (this year's performance is comparable to what we've seen in the past year after a retracement year), we also need to keep an eye on New news, as well as investor attitudes towards the asset class, will see how this affects this trend.

Note from WEEX:

• In the first bull market cycle (October 5, 2009-June 8, 2011), Bitcoin rose 41,771 times and lasted for 611 days;
• In the second round of bull market cycle (November 18, 2011-November 29, 2013), Bitcoin rose 621 times and lasted for 742 days;
• In the third round of bull market cycle (January 14, 2015-December 17, 2017), Bitcoin rose 130.5 times and lasted for 1,068 days;
• In the fourth bull market cycle (December 15, 2018-November 10, 2021), Bitcoin rose 22.1 times and lasted for 1,061 days.
• In the first round of retracement cycle (June 8, 2011-November 18, 2011), Bitcoin fell by 93.7% and lasted for 163 days;
• In the second round of retracement cycle (November 29, 2013-January 14, 2015), Bitcoin fell by 87.7% and lasted for 411 days;
• In the third round of retracement cycle (December 17, 2017-December 15, 2018), Bitcoin fell by 84.3% and lasted for 363 days;
• In the fourth round of retracement cycle (November 10, 2021-November 21, 2022), Bitcoin fell by 77.6% and lasted for 376 days.

That is to say, as Bitcoin assets and investors continue to mature, the gains of each round of bull market are getting smaller and smaller, and the decline of each round of bear market is getting smaller and smaller; the duration of bull market is longer and longer, and the duration of bear market is longer The time from the second cycle is basically more than one year.