What's going on with Litecoin these days?

14 December, 2019

Doesn't it seem like Bitcoin gets all the cryptocurrency press? Even so, there are some other cryptocurrencies that deserve some love. Litecoin is one of them. Created just two years after Bitcoin, Litecoin is one of the older cryptocurrencies out there. It is also one of the least talked about.

So, what is going on with Litecoin these days? A lot, actually. Right now, it is suffering from the same bear market that has seen Bitcoin's price fall from a 2019 peak of just over $13,000 earlier this year to its current level of $7,200. Litecoin peaked at $140 in June. It was trading at about $45 when this post was written.

Unfortunately for Litecoin investors, the cryptocurrency is struggling right now. Few expect the struggle to be permanent, but what is going on right now is keeping Litecoin's price lower than most people would like to see it. If you would like to know more, keep reading. This post will explain some of what is influencing Litecoin right now.

A brief history

Litecoin was launched in 2011 as an open source peer-to-peer cryptocurrency platform. It was the creation of former Google employee and Coinbase engineering director Charlie Lee. Lee created Litecoin by forking the Bitcoin core and then modifying it to create a new cryptocurrency he thought superior to Bitcoin.

Technically speaking, Litecoin is nearly identical to Bitcoin. The only two substantive differences are transaction speeds and proof-of-work. The Litecoin network automatically adjusts the amount of work necessary to complete a block in order to keep transaction times fairly low. Where a Bitcoin block can take up to 10 minutes to process, a Litecoin block can be completed every 2.5 minutes.

As for the proof-of-work algorithm, Litecoin's is memory-hard. As such, it requires considerably more memory. That makes mining equipment more expensive for Litecoin miners. Remember that because it will come into play later in this post.

Litecoin halved in August

Litecoin is similar to most other cryptocurrencies in that it rewards miners for the work they do. Miners are rewarded in coin for every block they complete. Another similarity is observed in something known as 'halving'. This occurs when a cryptocurrency's mining reward is cut in half. In Litecoin's case, it occurs every four years. Litecoin was last halved this past August (2019).

Why does halving occur? It is a mechanism for maintaining a cryptocurrency's value as the supply of coins in circulation increases. Without halving, coin values would diminish as coin supply grows. Bitcoin's original creator understood this principle and, as a result, wrote halving into his code as a safeguard.

Halving works by making every coin earned by miners more valuable. Think of it in terms of your job. If your employer cut your pay in half without reducing the amount of work you had to do, the pay you did receive would become more valuable to you. The same concept holds true in cryptocurrency mining.

As well as the halving principle works, it does have its drawbacks, as evidenced by Litecoin's recent mining trend. Since July, the number of active miners on the Litecoin network has fallen by some 70%. Miners are simply decommissioning their machines and shutting them off.

Mining measured in hashes

The best way to understand the rate of mining activity is to measure hashes. More specifically, you measure hatch rates. Hash rates provide a representation of how much computing power is being used to process blocks at any given time. The higher the hash rate, the more active miners there are on the network. A lower hash rate indicates fewer miners.

According to Coindesk, Litecoin's hash rate hit its lowest point of the year on November 30, measuring 149.6 terahashes per second. That might seem like a lot, but it is not for cryptocurrency mining. Under normal circumstances, one would expect twice that rate for Litecoin.

Questions abound as to why miners are dropping off Litecoin's network. Did August's halving impact miners negatively? Is it a price thing? Is Litecoin no longer profitable? Actually, it is a combination of all three things.

When rewards are halved

As previously explained, halving mining rewards is an artificial way of protecting the value of a cryptocurrency. However, it doesn't always have that effect. There is a point of diminishing returns, a point at which halving can drive miners away. Fewer miners leads to lower hash rates which tend to scare investors too. The result is a price drop.

The current situation seems to have created a cycle which may prove difficult to break. To understand it better, put yourself in the position of a Litecoin miner who spent $3,500 on computer equipment to get started. Imagine you were making barely enough profit prior to the August halving. Once your reward is cut in half, you are making even less profit - if any at all. What are you going to do?

It appears as though a sizable percentage of small-time operators have gotten out. Their profits are so small that it is not worth the trouble to continue running their machines. Coindesk estimates that miners using state-of-the-art hardware were making about $2.65 per machine, per day back in June. Now that is down to a $1.68. Miners running older equipment are making as little as seven cents per day.

For a big-time operation running hundreds of servers, making good money is still possible, albeit challenging. But if you are a small-time miner with just one or two computers, it is hardly worth it for the amount of money you're making.

Lower prices having an impact

The other part of this cyclical equation is found in the price of Litecoin itself. Remember that miners are rewarded in coin for the work they do. They take the coins they earn and sell them on the open market. That is how they make money. When you consider a drop in price from $140 down to $45, you suddenly realize that miners are earning even less for the work they do.

Not only have their rewards been halved since August, but the coins they earn are worth 82% less than they were over the summer. That is not a good recipe for profitability. Miners barely hanging on before the halving started getting out as soon as halving occurred.

The impact of energy costs

Coindesk suggests that some of the loss in mining capability is attributed to power costs. They cite Chinese miners as an example. Apparently, many have decommissioned their machines now that the rainy season is over. Why would rain have anything to do with it? Because hydropower is cheap in China during the rainy season. After the season, electricity prices go back up.

It could be that some of the Chinese miners who recently decommissioned will get back online next spring. Either way, energy costs absolutely effect mining profitability. The more money you spend on the electricity that powers your computers, the less money you are making by building blocks.

This would theoretically have a measurable impact on mining operations based on daily temperatures. For example, did you know that colder climates are preferred for mining operations? Miners do not have to put so much effort into keeping their servers cool in locales where temperatures are not so high. Less cooling means less energy consumed.

The other side of that coin are environments where temperatures tend to get warm. The warmer it is outside the more energy must be devoted to keeping servers cool. That means a higher cost of mining. All of this is to say that seasonal changes have probably contributed to Litecoin's loss of mining capability, at least to some degree.

The impact of less work

There is one final factor to consider as we seek to understand what is going on with Litecoin right now. Unlike Bitcoin, Litecoin automatically adjusts the amount of work necessary to process transactions and build new blocks. It was built this way to help keep transaction times as low as possible.

When Litecoin's hash rate declines, so does the amount of work required. The idea here is to use the lower work requirement as a carrot to dangle in front of prospective miners in hopes that they will join the network. Knowing that, Litecoin's current workload should be significantly lower than it was when hash rates peaked back in July.

What we are describing here is something known in the industry as 'mining difficulty'. Litecoin's mining difficulty is reassessed every four days or so. If mining difficulty is preventing blocks from being processed in 2.5 minutes or less, it is reduced. If it is so low that blocks are being built too quickly, it is increased. Right now, Litecoin's mining difficulty is at its lowest point of the year.

In theory, this should attract new miners. Unfortunately, it has not. This is where the previously mentioned cycle comes into play. Some 70% of existing miners decommissioned between August and the end of November. That sent Litecoin's hash rate plummeting which, some speculate, has contributed to Litecoin's price drop.

Even with a reduced mining difficulty in play, Litecoin's current market price and halved reward are not enough to induce new miners to join the network. Until the price rebounds, things are not likely to change.