Litecoin Price Analysis – Block reward halving on the horizon

Litecoin (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 Bitcoins 10 minutes, a four-fold increase in total supply, and uses a different Proof of Work consensus algorithm called Scrypt. The crypto asset has increased 530% in value from the December lows and remains down 74% from a record high set in December 2017. The market cap currently stands at US$8.52 billion with US$3.16 billion in exchange-traded volume over the past 24 hours. Money flows over the past day also shows substantial flows to and from BTC at US$741 million, Tether (USDT) at US$466 million, and the U.S. Dollar (USD) at US$113 million.

Source: https://coinlib.io/global-crypto-charts

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 2013-2017. Despite selling all of his LTC holdings in December 2017, Lee continues to be involved in Litecoin development and the community at large, including spearheading the SegWit upgrade on the LTC protocol and a Coinbase listing.

Lee has most recently 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.

Source: https://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. The SW protocol upgrade also enables transactions to be used on the Lightning Network (LN), a bi-directional, off-chain, hub-and-spoke payment channel. SW use has averaged over 50% in the past few months. Currently, LN channels 1,300 and the network capacity exceeds 325 LTC, or US$45,000.

The number of LTC transactions per day (line, chart below) has ranged between 22,000-30,000 since mid-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 183 pending LTC transactions.

The average transaction value (fill, chart below) fell dramatically throughout 2018 but has increased substantially in 2019 along with the increase in price. Average transaction values are down substantially from a high of ~US$59,000 in November 2017 and are currently just over US$14,500. As LTC price rises, average transaction values will also likely rise.

Source: coinmetrics.io

The networks block size (line, chart below) fell dramatically throughout 2018 and early 2019 but has increased rapidly over the past few weeks. The average transaction fee (fill, chart below) have increased as block size and price has increased, and is currently US$0.088, which is about 2.5% of the current BTC transaction fee. Fees spiked to nearly US$0.16 in late May. Litecoin Core v0.17.1, released last month, lowered the default minimum transaction fee to 0.0001 LTC/kB.

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has been ranging between 22 and 48 since July 2018. An NVT below 20 would likely indicate organic and sustained bull market conditions based on this metric. 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 continued to decline since January 2018 (fill, chart below), but remain well above historic levels. However, LTC has far fewer MAAs than either BTC or ETH, slightly fewer than DogeCoin (DOGE), just over 6x more active addresses than ripple (XRP), and 1.5x more active addresses than EOS (EOS).

The top 100 LTC addresses currently hold 42% of the available supply, compared to 16% for BTC, 33% for ETH and 78% for XRP. In November 2018, Coinbase created 40 new LTC cold storage addresses, each containing 300,000 LTC.

Source: coinmetrics.io

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. The metric was created through a combination of efforts by Murad Mahmudov, David Puell, Nic Carter, and Antoine Le Calvez.

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 upside.

Source: coinmetrics.io

Of the 84 million LTC to ever exist, 74.06% have been mined. Inflation per year currently stands at 8.82% and is set to decrease to 4.26% after the next block reward halving on August 7th of this year. The network currently has 214 active public nodes, most of which reside in the United States and Germany. Only 18% of these nodes are running the latest version of Litecoin Core.

Since mid-December, difficulty and hash rate have rebounded substantially, both reaching new record highs several times over the past few months. Scrypt ASIC miners available for LTC include the Innosilicon A4, A4+, and A6, FusionSilicon X6 Miner, the Bitmain Antminer L3+ and L3++, and the BW L21. All of which are profitable at an electricity cost of US$0.05 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. Nevertheless, mining profitability for LTC sits near an all-time low. Factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees.

Source: bitinfocharts.com

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.

Over the past year, over 150 developers have contributed a cumulative 364 commits. There have been three commits in the past 90 days on the main repo, litecoin-project/litecoin (shown below). Compared to previous years, 2019 has seen a marked reduction in dev activity, however, Charlie Lee has stated “we don’t work on the master branch” of the GitHub repo.

Source: https://github.com/litecoin-project/litecoin

Exchange traded volume during the past 24 hours has been predominantly led by the Tether (USDT) and Bitcoin (BTC) pairs with the U.S. Dollar (USD) and Ethereum (ETH) pairs also sharing a substantial but smaller volume. The Japanese Yen (JPY) and Chinese Yen (CNY) pair holds no premium over the USDT pair, but the Korean Won (KRW) pair holds a premium of 2.5%.

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, Huobi, EscoDEX, QuantaDEX, and DragonEX. 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 in the next few weeks.

Google Trends interest for the term "Litecoin" recently saw the largest increase since February 2018. 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

LTC has outperformed most cryptocurrencies and assets since the beginning of the year on exuberant volume and price action. A roadmap for the potential for bullish continuation or pullback potential can be deduced using exponential moving averages (EMAs), Volume, Chart Patterns, 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 and 200-day EMAs crossed bullishly on March 27th, ending the 310-day bear trend. The 200-day EMA is currently US$73 and should act as support for any upcoming pullback. Historic price action has also shown strong support near US$111. The volume profile (horizontal bars) shows a high volume area at US$55 to US$62, which will also now likely act as support. There is also currently a growing bearish divergence on both RSI or volume, indicating weakening bullish momentum.

Open interest on Bitfinex for the LTC/USD pair is 74% long with both longs and shorts rising over the past few days (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.

Price has also formed a potential bearish reversal pattern, the rising wedge. Hallmarks for this pattern include a series of higher highs and higher lows confined in a tightening zone. According to chart pattern specialist, Thomas Bulkowski, “rising wedges are some of the worst performing chart patterns which can breakout in any direction, but break downward 60% of the time.” Price is now above the resistance line, which likely invalidates the pattern. Historically, for cryptocurrencies, rising wedges have had a tendency to represent continuation and not reversal. Nevertheless, a pullback based on the parabolic version of the pattern is still possible.

A bullish Pitchfork (PF) has formed over the past few months, with several touches of the median line (yellow) as well as the upper and lower diagonal zones. Since late April, price has largely remained below the median line. Current maximum topside resistance sits at US$161, where the PF projects selling momentum. Downside resistance sits at US$100, where the PF projects selling momentum. The PF will be invalidated if price breaches the US$100 zone.

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 100% bullish; price is above Cloud, Cloud is bullish, TK cross is bullish, and Lagging Span is above Cloud and above price. Kijun support sits at US$104. The trend will remain bullish as long as price remains above the Cloud

Lastly, the LTC/BTC pair on the daily chart has quickly turned from bearish to bullish over the past month as price has risen above the Cloud and above the 200-day EMA. There is also no bearish divergence to suggest an end to bullish momentum, but RSI is currently at 83, the highest level since February. Historically, LTC/BTC has not been able to maintain a price above 0.02 BTC and a price above 0.025 BTC would represent a new four-year high.

Conclusion

Fundamentals suggest a slight uptick in both transactions per day and active addresses over the past few weeks. Both NVT and MVRV show no warning signs of an immediate price reversal. Hash rate continues to increase, potentially fueled by cheap electricity in China, and may bring additional selling pressure as miners look to get a return on investment. Developer activity on the main GitHub repo has been nearly non-existent over the past eight months, despite a recent Litecoin Core upgrade. The most important fundamental driver over the next six months is, most likely, the block reward halving in August this year.

Technicals suggest an imminent blow off top for LTC/USD as well as swift reversal for LTC/BTC above 0.02 BTC. Both a parabolic rising wedge and bullish pitchfork point to a resistance zone near US$160. There is also a growing multi-day bearish divergence suggesting weakening bullish momentum. However, both the Cloud and high timeframe EMAs suggest no imminent mean reversion. The trend for LTC/BTC is strongly bullish, but RSI and trend metrics suggest a potential mean reversion towards 0.015 BTC.