By Greg Cipolaro, Director of Global Research, NYDIG
Compiler: WEEX
Key points of this article:
Litecoin will usher in its third halving this week. By observing Litecoin, we can provide a reference for Bitcoin’s performance during the halving process.
Before and after this halving, Litecoin’s performance has some similarities with previous halvings, but it also showed new signs.
Changes in Litecoin’s behavior during the halving may have implications for Bitcoin, some of which we have already noticed as the Bitcoin asset and investor base mature.
Bitcoin’s cyclical price trend is one of the unexplained mysteries in cryptocurrency investment, namely the bull-bear cycle pattern that repeats every four years centered on the block reward halving. On the face of it, these repeating patterns violate even a weak form of the efficient market hypothesis (EMH), which states that future price movements are unaffected by historical price information, but for whatever reason, cryptocurrencies keep repeating themselves again and again. this model.
Two interpretations of cycles
There are two plausible explanations for these patterns in the market. First, Bitcoin’s 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 caused extreme deviations from this growth trajectory. It’s normal for new technology innovations to go through periods of hype, both the Gartner Hype Cycle and Carlota Perez’s Technology Revolution Framework describe this well; however, Bitcoin is the only one we know of that goes through these cycles repeatedly Technology.
WEEX Note: The Gartner 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. In the hype stage, the technology is usually over-hyped and overestimated, and its advantages and potential applications are often exaggerated. In the subsequent disappointment stage, the technology may encounter a certain degree of criticism and skepticism because actual applications are not as good as expected.
The Carlota Perez technological revolution framework is a theoretical framework proposed by economist Carlota Perez to describe the impact of technological revolutions 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. During the bubble period, emerging technologies usually attract a lot of attention and investment, and market enthusiasm is high, but then there may be a certain degree of market adjustment and pullback.
Back to the text, another explanation for the market's cycle of cryptocurrencies every 4 years is that the price of Bitcoin is determined by artificial factors because it does not generate discountable cash flows, so there is almost no standard to measure the value of the 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 you explain these repeating patterns in Bitcoin, it is not the only crypto asset with repeating patterns. Launched in 2011, Litecoin has some similar economic variables to Bitcoin, except that it is either multiplied or divided by 4 (the cap supply is 84 million instead of 21 million, and one is produced on average every 2.5 minutes instead of 10 New blocks, halved every 840,000 blocks instead of every 210,000 blocks), experienced its own unique price repeating pattern surrounding the reward halving.
This week (expected on August 3, editor’s note), Litecoin will usher in the third halving in its history (Bitcoin is scheduled to undergo its fourth halving at the end of April next year). Although Litecoin’s price cycle Very different from Bitcoin, but we wanted to take a look at Litecoin's cycle performance and how it changes, which may be instructive on how the Bitcoin cycle changes in the future.
The Litecoin halving cycle is characterized by price bottoming 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 cycle of LTC is different from that of BTC
Litecoin’s early halving performance typically outperforms Bitcoin’s
Litecoin typically outperforms Bitcoin during the first phase of the halving cycle, as shown in the chart below. Litecoin typically bottoms with Bitcoin but outperformed Bitcoin in the months leading up to the halving.
LTC usually outperforms BTC before halving
Litecoin's cycle has been quieter this time around
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 decreases with each successive cycle.
The first is the duration of the cycle. As shown in the chart below, there is significant 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.
LTC halving cycle data
If we look at returns over the halving cycle, from trough price to peak price, we notice a consistent trend of declining returns. In the first two halving cycles, the returns from trough 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%.
LTC Price and Returns
This is even more evident if LTC-BTC (the Litecoin price denominated in Bitcoin) is used to compare with the Bitcoin price. Litecoin has significantly outperformed Bitcoin through the first two halvings, as shown by LTC-BTC’s trough-to-peak returns. However, despite rising nearly 75% ahead of its third halving, Litecoin still underperformed Bitcoin at its price peak.
In November last year, Litecoin did experience a brief moment of glory. At that time, its rebound from the low point significantly outperformed Bitcoin, and it seemed that another halving cycle had begun. But those outsized gains ended quickly, peaking in the third week of November. Since then, Bitcoin has outperformed Litecoin, and while Litecoin’s absolute price (in USDT, editor’s note) peaked, LTC-BTC relative prices declined from trough to peak.
LTC-BTC price and returns
Why is this important to 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 talked about these days (but is still in the top 10 coins by market cap, not considering stablecoins ). The reason is that the Bitcoin halving will arrive in less than a year (expected to be on May 9, 2024, editor's note), and investors are looking for clues about 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 Bitcoin halving cycle returns from trough to peak, as well as the retracement rate from peak to trough, have weakened over time, that is, the highs are lower and the retracements are lower. 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 (with this year's performance being on par with what we're used to seeing in the year following a drawdown year), we also want to keep an eye on New news, as well as investor attitudes towards this asset class, to see how these may impact this trend.
BTC cycle
Editor's note:
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 bull market cycle (November 18, 2011 - November 29, 2013), Bitcoin rose 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 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.
In other words, as Bitcoin assets and investors continue to mature, the increases in each bull market will become smaller and smaller, and the declines in each bear market will also become smaller and smaller; the bull market will last longer and longer, and the bear market will continue to The time from the second cycle is basically more than 1 year.
Recommended reading:
BTC becomes the currency of choice in the AI era
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