Halving could increase the aggregate efficiency and profit margins of some miners. Litecoin is registering an increase in the difficulty of mining and in the crypto asset’s prices.
The data provider Coin Metrics says that the reduction by half of the block reward, or Litecoin halving (LTC), will prove the probable effects of these reductions that are expected in miners’ behavior, such as in the crypto asset market cycles.
An analysis published on Coin Metrics corporate blog warns about the possible exit of inefficient miners once Litecoin halving occurs, approximately on August 5th. The researchers add that, when cutting the reward per mined block by half, profitability is immediately affected. This occurs as a consequence of the fall in income.
Since miners operate as large-scale companies and face recurring operating costs (mainly the cost of electricity) that they pay with fiat currencies, they must regularly sell some of their block rewards. Given that mining represents a perfectly competitive industry where profits are constantly seeking a stable state of zero economic surplus, most of the mining block rewards must be sold for fiat money.
Once the reduction occurs, operators will have to continue spending the same amount of electricity to extract fewer cryptocurrencies. This decreases their profit margins and makes it difficult to maintain the balance between income and production costs. This would be detrimental to some miners, who will not be able to sustain the balance, so they will probably leave the network.
The researchers explain that the sales pressure from miners is significant. They mention that in 2018 Litecoin mining revenues totaled almost 5.3 million LTC, equivalent to US $561 million. Consequently, it is estimated that annual inflation, which currently is 8%, will fall by half (4.4%). They say that this represents a significant drop in the sales pressure led by miners.
Possible Effects on Mining Power
The report also considers that Litecoin halving will increase the aggregate efficiency and profit margins of the miners remaining in the network. Even though those miners will start selling less, they will also tend to retain more profits. This occurs as a result of the departure of some operators.
It should be recalled that, after the first reduction of LTC rewards occurred in 2015, there was a flat or negative difficulty growth. This event led to a mining capitulation in mid-2016. However, researchers believe that this situation is unlikely to be repeated on this occasion, given the current development of mining technology.
It is worth noting that LTC has been recording a steady increase in mining difficulty, which has reached record figures in recent months. The upward trend is also observed in its price. Both facts are related to the usual pattern followed by cryptocurrencies before their halving. The market cycle that is usually observed implies a price increase before the event and a decrease in its value after the reduction of rewards.
However, Coin Metrics says it is still too early to draw definite conclusions. Therefore, many predictable effects should not be taken for granted. In that sense, it is necessary to wait a few days to analyze in detail the impact of the reduction of rewards in the cryptocurrency’s performance.
By Willmen Blanco