Litecoin Price Analysis – Bearish price action likely

The Litecoin (LTC) spot price increased nearly 550% from December to June, but has fallen 60% from the June high, and remains down 85% from the record high set in December 2017. The market cap currently stands at US$3.51 billion with US$816 million in exchange-traded volume over the past 24 hours.

LTC is a Bitcoin (BTC) fork created by Charlie Lee in 2011. The network has a target block time of two minutes and 30 seconds, as opposed to Bitcoin’s 10 minutes, a four-fold increase in total supply, and uses a different Proof of Work consensus algorithm called Scrypt.

Charlie Lee is a former Google employee and the brother of Bobby Lee, CEO of the now-closed Chinese cryptocurrency exchange BTCC. Lee worked as an engineer at Coinbase from 2013 to 2017, where he was instrumental in spearheading the LTC listing on Coinbase.

Despite selling all of his LTC holdings in December 2017, Lee continues to be involved in Litecoin development and attempts to increase Litecoin adoption through the Litecoin Foundation, a non-profit registered in Singapore. The next Litecoin summit is scheduled for the end of October in Las Vegas.

Two recent partnerships established by the Foundation include; Glory kickboxing, the Miami Dolphins professional football team, and Flexa, which added LTC as a method of payment to it’s 39,000+ merchant network. The Foundation further announced a partnership with the Bibox exchange and Ternio in mid-June, which will result in a physical debit card which allows direct cryptocurrency spending.

Turning to developer activity, the LTC project has 37 repos on GitHub. Most coins use the developer community of GitHub where files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.

In a tweet thread Lee addressed the growing concerns around the seemingly low level of development. He explained that the Litecoin project has only ever had a total of six core developers, who mainly merge BTC code into the LTC code. Adrian Gallagher (thrasher), one of the core developers, works on a personal branch and then merges finalized changes with the master branch at a later date. Gallagher’s personal branches are not tracked, while the final merge is.

Over the past year, there have been a cumulative 22 commits to the main GitHub repo, litecoin-project/litecoin (shown below), with no commits in the past 90 days. Compared to previous years, 2019 has seen a marked reduction in dev activity. Last week, Litecoin.com announced that Litecoin Core 0.18.1 has entered the final testing stage.

Source: GitHub

Lee has also discussed adding confidential transactions to the LTC blockchain via bulletproofs and MimbleWimble (MW). Both of these changes could be added through a soft fork and would offer privacy solutions with complete fungibility between transactions. Bulletproofs use zero-knowledge proofs while MW uses a specific type of transaction mixing to obscure transaction details. Bulletproofs are currently active on Monero (XMR), while MimbleWimble is currently active on the nascent Beam (BEAM) and Grin (GRIN) chains.

In late 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) blacklisted two specific Bitcoin addresses for the first time, both of which had been used for ransomware. In August, OFAC blacklisted 10 BTC addresses and one LTC address connected to narco trafficking. These blacklisting procedures decrease coin fungibility and increase coin surveillance, adding confidential and/or private transactions would aid to combat these measures.

Source: thebitcoin.pub/t/mimblewimble-the-good-and-the-bad/49971

On the network side, LTC uses SegWit (SW) enabled addresses to both decrease individual transaction size and cost, as well as increase the maximum block size to more than 1MB. SW use has increased to over 70% in the past few months and also enables transactions to be used on the Lightning Network (LN), a bi-directional, off-chain, hub-and-spoke payment channel. The LTC LN currently has 877 channels and the network capacity exceeds 195 LTC, or US$10,700.

The number of LTC transactions per day (line, chart below) has ranged between 20,000-40,000 since March 2018. Transactions rose substantially in December 2017 and January 2018, which was most likely in response to the expensive and delayed transactions on the BTC network. There are currently only 165 pending LTC transactions.

The average transaction value on the LTC network (fill, chart below) fell dramatically throughout 2018 but has increased substantially in 2019, and recently exceeded US$6,500. This increase has also followed the December to June increase in LTC price. Average transaction values are down substantially from a high of ~US$30,000 in November 2017.

Source: CoinMetrics

The networks block size (line, chart below) fell dramatically throughout 2018 and early 2019, but has decreased dramatically since the halving earlier this year. The average transaction fee (fill, chart below) has increased and decreased with block size, and is currently US$0.025, only 2.8% of the current BTC transaction fee. Fees spiked to nearly US$0.16 in late May, along with the spike in transactions at that time. Litecoin Core v0.17.1, released in May, lowered the default minimum transaction fee to 0.0001 LTC/kB.

Source: CoinMetrics

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) is currently 81 and rising, well above the historic norm. An NVT below 20 would likely indicate organic and sustained bull market conditions.

Inflection points in NVT can be leading indicators of a reversal in asset value. An uptrend in NVT often suggests a coin is overvalued based on its economic activity and utility, which should be seen as a bearish price indicator, whereas a downtrend in NVT suggests the opposite.

Active and unique addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. Monthly active addresses (MAAs) have declined since January 2018 (fill, chart below), but remain well above historic levels. However, LTC has far fewer MAAs than either BTC, ETH, or DogeCoin (DOGE), and over 19x more active addresses than Ripple (XRP).

The top 100 LTC addresses currently hold 39% of the available supply, compared to 14% for BTC, 33% for ETH, and 78% for XRP. Most of these top addresses are most likely exchange holdings. In November 2018, Coinbase created 40 new LTC cold storage addresses, each containing 300,000 LTC.

Source: CoinMetrics

Another crypto-native fundamental metric is the MVRV ratio, or the market cap divided by the realized cap. Realized cap approximates the value paid for all coins in existence by summing the market value of coins at the time they last moved on the blockchain.

Historically, periods of an MVRV less than 0.5 have represented oversold conditions, whereas periods of an MVRV greater than 2.5 have represented overbought conditions. Both MVRV levels above three have represented all-time highs in price. Currently, MVRV is under the median of both extremes, suggesting the potential for additional downside.

Source: CoinMetrics

Hash rate and difficulty rose substantially from mid-December to early August, with both reaching record highs. Since the block reward halving in early August, the hash rate has dropped nearly 50%.

Of the 84 million LTC to ever exist, 75.52% have been mined. Inflation per year currently stands at 4.23% and is set to decrease to 1.80% after the next block reward halving in August 2023. The network currently has 1,701 active public nodes, most of which reside in the United States and Germany. Only 44% of these nodes are running the latest version of Litecoin Core.

Source: BitInfoCharts

Mining profitability for LTC currently sits at an all-time low. Factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees. Both price and difficulty have fallen dramatically since June.

Most Scrypt ASIC miners available for LTC (shown below) are not profitable at an electricity cost of US$0.04 cents/KWh. During the flood season from April to October every year in the Chinese province of Sichuan, electricity drops to a cost of US$0.04 cents/KWh due to the abundance of hydroelectric power.

Source: asicminervalue

Exchange traded volume during the past 24 hours has been predominantly led by the Tether (USDT) and Bitcoin (BTC) pairs, with the Ethereum (ETH) and U.S. Dollar (USD) pairs also providing substantial but smaller volumes. The Korean Won (KRW), Japanese Yen (JPY), and Chinese Yuan (CNY) pairs holds no premium over the USDT pair.

LTC has continued to gain exchange listings, custody solutions, and exposure over the past year, including new LTC pairs on Coinbase, Poloniex, Bittrex, Gemini, CMC markets, OKEx, Binance, Binance.US, Huobi, EscoDEX, QuantaDEX, DragonEX, BTSE, Voyager, and Sofi. Litecoin.com also added a buy function with pairs in USD, EUR, and GBP, along with a logo redesign.

CoinGate and Travala.com both enabled LTC payment support for merchants and hotels, while the UK CFD exchange, FXCM, added an LTC/USD pair and LTC was added to the Coinbase Wallet. ErisX, a CFTC-regulated Designated Contract Market, is also attempting to launch LTC spot trading and a futures contract this year. Fidelity and TD Ameritrade may also launch an LTC trading product by year’s end.

Worldwide Google Trends interest for the term "Litecoin" increased slightly throughout June, but has since declined by an equal magnitude. A slow rise in searches for "Litecoin" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between the Google Trends data and Bitcoin price, while a 2017 study concluded that when the U.S. Google "Bitcoin" searches increase dramatically, Bitcoin price drops.

Technical Analysis

The previous halving in August 2015, led to a nearly 600 day period of ranging price action. Although LTC has outperformed most cryptocurrencies and assets since the beginning of the year, a more bearish picture may be more likely in the following months. A roadmap for potential trend continuation can be deduced using Exponential Moving Averages, Volume Profile of the Visible Range, Pitchforks, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50-day Exponential Moving Average (EMA) and 200-day EMA crossed bearish on August 29th, ending a 156-day bullish trend. The previous bear trend lasted over 300 days and resulted in an 80% down move.

The 200-day EMA is now above the current spot price, at US$80, and should act as resistance going forward. Volume Profile of the Visible Range (VPVR) currently shows strong support between the US$50-US$60 range. There is no active volume or RSI divergence at this time as the current low in price also made a new low on RSI.

Open interest on Bitfinex for the LTC/USD pair is 78% long with longs dropping slightly over the past few weeks and shorts slightly increasing over the same time period (top panel, chart below). A significant price movement downwards will result in an exaggerated move further, as the long positions will continue to unwind. This is known as a “long squeeze.” On March 30th and 31st, shorts held a greater percentage than longs and a short squeeze occurred shortly thereafter, sending price much higher very quickly.

Turning to the Ichimoku Cloud, four metrics are used to determine if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when most of the signals flip from bearish to bullish, or vice versa.

Cloud metrics on the daily time frame, with doubled settings (20/60/120/30) for more accurate signals, are bearish; price is below the Cloud, the Cloud is bearish, the TK cross is bearish, and Lagging Span is below Cloud and below the current spot price. Based on the Cloud, a bear trend has now definitively formed. The trend will remain bearish so as long as price remains below the Cloud.

Historically, LTC/BTC has not been able to maintain a price above 0.02 BTC and has remained above 0.005 since March 2017. The LTC/BTC pair on the daily chart has remained bearish since mid-June, with price below both the 200-day EMA and Cloud. Further, there are no building bullish divergences to suggest an end to the bearish momentum.

Based on the distance of price from both the 200-day EMA at 0.0107 BTC, and Kijun, at 0.0119 BTC, a mean reversion attempt is possible, with price heading back to those price zones. However, the previous mean reversion move to the 200-day EMA during a definitive bear trend took over 200 days before completion.

Conclusion

Fundamentals show that on-chain activity has maintained the same range over the past few weeks, which is down from the block reward halving in August. Both NVT and MVRV show no warning signs of immediate bearish continuation, but NVT remains well-above historic highs, again suggesting decreased on-chain utility compared to previous periods. Hash rate has definitively reached a plateau and is now experiencing a 50% reduction as the mining profitability sits at all-time lows.

Developer activity on the main GitHub repo has been nearly non-existent over the past few months, despite a recent Litecoin Core upgrade in June and an upcoming upgrade later this year. Charlie Lee addressed this growing concern, explaining that LTC has a limited dev team that mostly merges BTC upgrades into LTC. Further, Adrian Gallagher (thrasher), one of the core developers, works on a personal branch and merges finalized changes with the master branch at a later date, which may explain the lack of activity on the main LTC repo.

Technicals for the LTC/USD pair remain bearish after the exuberant bull run leading in to the block reward halving. With a Death Cross and bearish Cloud metrics on the daily, LTC likely has further bearish price action ahead. Significant near term support sits between US$50 to US$62, based on the historic volume profile. Any bullish momentum in the near term will likely react as a mean reversion move towards both the 200-day EMA and Kijun at US$80.

Technicals for the LTC/BTC pair are even more bearish, with price threatening a new multi-year low. Beyond previous historic lows of 0.006 BTC – 0.007 BTC, there is very little support until the next psychological level at 0.005 BTC. Similar to the LTC/USD pair, mean reversion attempts become increasingly likely as local lows hold as support. Bullish price action towards the psychological level of 0.001 BTC would split the difference between the Kijun 0.0119 BTC and the 200-day EMA at 0.00945 BTC.