NYDIG Litecoin halves on Thursday, what clues does it provide for Bitcoin’s halving market?

Author: Greg Cipolaro, Global Research Director at NYDIG

Translation: WEEX

Key points of this article:

The cyclical price trends of Bitcoin are one of the mysteries in cryptocurrency investment. It is a repetitive bull and bear cycle pattern centered around block reward halvings that occurs every 4 years. On the surface, these repetitive patterns even defy the weak form of the Efficient Market Hypothesis (EMH), which states that future price trends are not influenced by historical price information. However, for whatever reason, cryptocurrencies repeatedly exhibit this pattern.

Two explanations for the cycle:

There are two reasonable explanations for these patterns in the market. First, the continued acceptance of Bitcoin has driven the value of the entire network and the price of Bitcoin itself. However, the fear and greed associated with this disruptive technology have caused extreme deviations from this growth trajectory. It is normal for new technological innovations to go through a hype period, as described by the Gartner Hype Cycle or Carlota Perez’s Technological Revolution Framework. However, Bitcoin is the only technology we know of that repeatedly goes through these cycles.

WEEX note: The Gartner Hype Cycle is a model proposed by the research and consulting firm Gartner to describe the development process of new technologies. The model divides the development process into different stages, including technology trigger, hype, disillusionment, understanding, and maturity. During the hype phase, technology is often overhyped and overestimated, with its advantages and potential applications exaggerated. In the subsequent disillusionment phase, technology may face criticism and questioning due to its actual application falling short of expectations.

Carlota Perez’s 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, technological revolutions include an eruption period, a rapid expansion period, a bubble period, a contraction period, and a deployment period. During the bubble period, emerging technologies typically attract a lot of attention and investment, and market enthusiasm is high, but there may be a certain degree of market adjustment and decline afterwards.

Returning to the main content, another interpretation of the four-year cycle of cryptocurrencies in the market is that the price of Bitcoin is determined by human factors, as it does not generate discounted cash flow, so there is almost no standard to measure the value of this 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

Regardless of how these repetitive patterns of Bitcoin are interpreted, it is not the only cryptocurrency with repetitive patterns. Litecoin was launched in 2011 and has some economic variables similar to Bitcoin, except that it either multiplies or divides by 4 (the upper supply limit is 84 million instead of 21 million, and a new block is generated every 2.5 minutes instead of 10 minutes, and it halves every 840,000 blocks instead of every 210,000 blocks) and has its own unique price repetitive pattern around the halving of rewards.

This week (expected on August 3rd, WEEX Note), Litecoin will experience its third halving in history (Bitcoin plans to have its fourth halving at the end of April next year). Although Litecoin’s price cycle is very different from Bitcoin, we want to take a look at Litecoin’s cycle performance and how it has changed. This may be inspiring for the future changes in Bitcoin’s cycle.

The characteristic of Litecoin’s halving cycle is that the price hits bottom 7-8 months before the halving (approximately during the low period of Bitcoin’s 4-year cycle), and then rebounds significantly, usually outperforming Bitcoin, until it reaches a price peak 1-1.5 months before the actual halving. Then, Litecoin enters a new cycle and finds a new bottom at some point after the halving.

Therefore, Litecoin’s halving cycle is an expected cycle, where the LTC price experiences troughs and peaks before the halving event. This is opposite to Bitcoin, which reaches a price peak after the halving occurs.

LTC’s halving cycle differs from BTC

Litecoin’s performance in the early stage of halving is usually better than Bitcoin

In the first stage of the halving cycle, Litecoin’s performance is usually better than Bitcoin, as shown in the following figure. Litecoin usually hits bottom at the same time as Bitcoin, but performs better than Bitcoin in the months leading up to the halving.

LTC usually performs better than BTC before halving, and the performance of Litecoin in this cycle is relatively calm

Observing the data behind the Litecoin halving cycle, there are two important conclusions – the duration of the cycle remains consistent, but the peak amplitude of each consecutive cycle has decreased.

Firstly, the duration of the cycle, as shown in the figure below, the time at the bottom has significant consistency, that is, 223-234 days before the halving date. The time of the peak is also the same, occurring 32-47 days before the halving.

LTC halving cycle data

If we observe the returns of the halving cycle, from the bottom price to the peak price, we will notice a consistent trend, that is, the rate of return is decreasing. For the first two halving cycles, the rate of return from the valley to the peak is relatively close, 550% and 505% respectively. However, the rate of return from the valley to the peak in the current cycle has sharply decreased to less than 75%.

LTC price and return

If we compare LTC-BTC (Litecoin price in Bitcoin) with the price of Bitcoin, this becomes even more apparent. For the first two halvings, Litecoin outperformed Bitcoin significantly, as indicated by the rate of return of LTC-BTC from the valley to the peak. However, despite Litecoin’s nearly 75% rise before the third halving, its performance at the price peak is still inferior to Bitcoin.

In November last year, Litecoin did experience a brief moment of glory, when it rebounded significantly from the low point and outperformed Bitcoin, seemingly starting another halving cycle market. However, this excess return quickly ended, peaking in the third week of November. Since then, Bitcoin’s performance has surpassed Litecoin, and when Litecoin’s absolute price (calculated in USDT by WEEX) reached its peak, the relative price of LTC-BTC from the valley to the peak has been declining.

LTC-BTC Price and Returns

Why is this important for Bitcoin?

You may wonder why most of our research this week focuses on discussing a little-known phenomenon, a token that is rarely mentioned nowadays (but still a top 10 cryptocurrency by market capitalization, excluding stablecoins). The reason is that Bitcoin’s halving is coming in less than a year’s time (expected on May 9, 2024, as noted by WEEX), and investors are looking for clues on how Bitcoin’s price will perform during the halving period. Observing the price performance of Litecoin during its previous halving cycles may give us insights into how Bitcoin will change during its own halving cycle.

In fact, we have noticed multiple times that the return from the bottom to the peak, as well as the retracement from the peak to the bottom, of Bitcoin’s halving cycles have weakened over time, with lower highs and smaller retracement percentages. Litecoin seems to exhibit this trend as well, especially during this current halving period. Therefore, there is reason to believe that this trend will continue as Bitcoin enters a new halving cycle.

Of course, past performance does not guarantee future returns, so while we expect these cycles to continue repeating (this year’s performance aligns with what we have seen in the year following retracement years), we also need to keep an eye on new developments and investor sentiment towards this asset class to see how they may affect this trend.

BTC Cycles

WEEX Note:

  • First bull market cycle (October 5, 2009 – June 8, 2011), Bitcoin rose 41,771 times and lasted 611 days;

  • Second bull market cycle (November 18, 2011 – November 29, 2013), Bitcoin rose 621 times and lasted 742 days;

  • Third bull market cycle (January 14, 2015 – December 17, 2017), Bitcoin rose 130.5 times and lasted 1,068 days;

  • Fourth bull market cycle (December 15, 2018 – November 10, 2021), Bitcoin rose 22.1 times and lasted 1,061 days.

  • First retracement cycle (June 8, 2011 – November 18, 2011), Bitcoin dropped by 93.7% and lasted 163 days;

  • Second retracement cycle (November 29, 2013 – January 14, 2015), Bitcoin dropped by 87.7% and lasted 411 days;

  • Third retracement cycle (December 17, 2017 – December 15, 2018), Bitcoin dropped by 84.3% and lasted 363 days;

  • Fourth retracement cycle (November 10, 2021 – November 21, 2022), Bitcoin dropped by 77.6% and lasted 376 days.

That is to say, as Bitcoin assets and investors mature, the increase in each bull market becomes smaller, and the decline in each bear market also becomes smaller; the duration of bull markets is getting longer, and the duration of bear markets has been around 1 year since the second cycle.

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