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

Key points:

• Litecoin will have its third halving this week. By observing Litecoin, we can provide a reference for Bitcoin’s performance during the halving process.

• Litecoin’s performance before and after this halving has some similarities to previous halvings, but it also shows new signs.

• Changes in Litecoin’s behavior during the halving period could have implications for Bitcoin, some of which we’ve already noticed as the Bitcoin asset and investor base mature.

One of the unexplained mysteries of cryptocurrency investing is the cyclical price movement of Bitcoin, a bull-bear cycle that repeats every 4 years, centered around the block reward halving. On the surface, these repetitive patterns even violate the weak form of the Efficient Market Hypothesis (EMH), which states that future price movements are not affected by historical price information, but for whatever reason, cryptocurrencies repeat this pattern again and again.

Two explanations for the cycle

There are two plausible explanations for these patterns in the market. First, Bitcoin adoption continues to grow, driving up the value of the entire network and the price of Bitcoin itself, but the human psychology of fear and greed associated with such a disruptive technology has caused an extreme deviation from this growth trajectory. It is normal for new technology innovations to go through hype periods, which are well described by both the Gartner Hype Cycle and Carlota Perez's Technology Revolution Framework; however, Bitcoin is the only technology we know of that has repeatedly gone through these cycles.

WEEX Note: Gartner Hype Cycle is a model proposed by 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. In the hype stage, technology is usually over-promoted and overestimated, and its advantages and potential applications are often exaggerated. In the following disappointment stage, because the actual application is not as expected, the technology may encounter a certain degree of criticism and questioning.

The Carlota Perez Technology Revolution Framework is a theoretical framework proposed by economist Carlota Perez to describe the impact of technology revolution on the economy and society. According to the theory, technology revolution includes the outbreak period, rapid expansion period, bubble period, contraction period and establishment period. In 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 main text, another explanation for the market's 4-year cycle of cryptocurrencies is that Bitcoin prices are determined by human factors, because it does not generate discounted cash flows, so there is almost no standard for measuring the value of the asset. And these human participants will look for a price pattern to guide future trends and unconsciously reproduce past price patterns.

Litecoin has its own halving cycle

Whatever the explanation for these repetitive patterns for Bitcoin, it is not the only cryptoasset with repetitive patterns. Litecoin, which launched in 2011 and has some similar economic variables to Bitcoin, except it is either multiplied or divided by 4 (capped supply of 84 million instead of 21 million, new blocks produced on average every 2.5 minutes instead of 10 minutes, and block halvings every 840,000 blocks instead of every 210,000 blocks), has experienced its own unique repetitive price patterns around reward halvings.

This week (expected to be on August 3, WEEX note), Litecoin will usher in the third halving in its history (Bitcoin is scheduled to have its fourth halving at the end of April next year). Although the price cycle of Litecoin is very different from that of Bitcoin, we want to look at the cyclical performance of Litecoin and how it changes, which may be instructive for how the Bitcoin cycle will change in the future.

Litecoin halving cycles are 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, usually outperforming Bitcoin, until a price peak 1-1.5 months before the actual halving. Litecoin then falls into a new cycle and finds a new bottom sometime after the halving.

Therefore, Litecoin’s halving cycle is an expected cycle, with LTC prices experiencing troughs and peaks before the halving event. This is in contrast to Bitcoin, which will reach its price peak only after the halving occurs.

LTC’s halving cycle is different from BTC

Litecoin generally outperforms Bitcoin in the early stages of halving

Litecoin typically outperforms Bitcoin during the first phase of the halving cycle, as shown in the chart below. Litecoin typically bottoms with Bitcoin but outperforms Bitcoin in the months leading up to the halving.

LTC usually outperforms BTC before halving, and Litecoin has performed relatively calmly in this cycle

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

The first is the duration of the cycle. As shown in the figure below, the timing of the trough is remarkably consistent, 223-234 days before the halving date. The same is true for the timing of the peak, which occurs 32-47 days before the halving.

If we look at the returns of the halving cycle, from the bottom price to the peak price, we will notice a consistent trend that the returns are decreasing. The returns from the bottom to the peak of the first two halving cycles were relatively close, at 550% and 505% respectively. However, the price returns from the bottom to the peak of the current cycle have dropped sharply to less than 75%.

This is even more evident when using LTC-BTC (the price of Litecoin denominated in Bitcoin) to compare to the price of Bitcoin. Litecoin significantly outperformed Bitcoin during the first two halvings, as shown by the trough-to-peak returns of LTC-BTC. However, despite Litecoin gaining nearly 75% before the third halving, it still underperformed Bitcoin at its price peak.

Litecoin did experience a brief moment of glory last November, when it significantly outperformed Bitcoin in its rebound from the lows, and it seemed that another halving cycle had begun. But this excess return soon ended, peaking in the third week of November. Since then, Bitcoin has outperformed Litecoin, and when the absolute price of Litecoin (in USDT, WEEX Weike Note) peaked, the relative price of LTC-BTC was falling from bottom to peak.

Why is this important for Bitcoin?

You may be wondering why most of our research this week is focused on discussing a little-known phenomenon, a coin that is rarely mentioned today (but is still a top 10 coin by market cap, not counting stablecoins). The reason is that the Bitcoin halving is coming in less than a year (estimated on May 9, 2024, WEEX Weike Note), and investors are looking for clues about Bitcoin's price performance during the halving. Observing Litecoin's price performance during consecutive halving cycles may tell us how Bitcoin will change during the halving cycle.

In fact, we have noticed many times that the return rate from the bottom to the peak of the Bitcoin halving cycle, as well as the retracement rate from the peak to the bottom, have weakened over time, that is, the highs are lower and the retracements are smaller. Litecoin 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 round of halving cycles.

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 in the year following a drawdown year), we’ll also want to continue to monitor new news and investor attitudes toward the asset class to see how these may impact this trend.

WEEX Note:

• In the first bull market cycle (October 5, 2009 - June 8, 2011), Bitcoin increased 41,771 times and lasted 611 days;

• In the second bull market cycle (November 18, 2011 - November 29, 2013), Bitcoin increased 621 times and lasted 742 days;

• In the third bull market cycle (January 14, 2015 - December 17, 2017), Bitcoin rose 130.5 times and lasted 1,068 days;

• In the fourth bull market cycle (December 15, 2018 - November 10, 2021), Bitcoin rose 22.1 times and lasted 1,061 days.

• In the first retracement cycle (June 8, 2011 - November 18, 2011), Bitcoin fell 93.7% and lasted for 163 days;

• In the second retracement cycle (November 29, 2013 - January 14, 2015), Bitcoin fell 87.7% and lasted 411 days;

• In the third retracement cycle (December 17, 2017 - December 15, 2018), Bitcoin fell 84.3% and lasted for 363 days;

• In the fourth retracement cycle (November 10, 2021 - November 21, 2022), Bitcoin fell 77.6% and lasted for 376 days.

That is to say, as Bitcoin assets and investors continue to mature, the gains in each bull market are getting smaller and smaller, and the losses in each bear market are also getting smaller and smaller; the bull market lasts longer and longer, and the bear market has basically lasted for more than one year since the second cycle.