Litecoin Price Analysis – Golden Cross not supported by on-chain metrics

The Litecoin (LTC) spot price has dropped nearly 15% since the block reward halving in August 2019, and remains down 78% from the record high set in December 2017. The market cap currently stands at US$5.05 billion, placing it 6th on the BraveNewCoin market cap table, with US$1.86 billion 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 10 minutes for BTC. LTC also has a four-fold increase in the total supply, and uses a different Proof of Work consensus algorithm called Scrypt.

Watch a summary of this analysis on YouTube

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 companies LTC listing.

Despite selling all of his personal LTC holdings in December 2017, Lee continues to be involved in the development process and attempts to increase adoption through the Litecoin Foundation, a non-profit registered in Singapore. The second-ever Litecoin summit occurred in Las Vegas at the end of October 2019, which was headlined by Ron Paul.

Seven recent partnerships established by the Foundation include; Cred, BlockFi, BitGo, Glory kickboxing, the Miami Dolphins professional football team, the San Diego Film Festival, and Flexa, which added LTC as a method of payment for its 39,000+ merchant network. Previous partnerships include the Bibox exchange and Ternio, which is set to issue a physical debit card allowing for direct cryptocurrency spending.

In October 2019, the Foundation released an unaudited financial statement showing net assets of US$570,000, after concerns were raised regarding the Foundation’s solvency. Lee added that “the Litecoin Foundation was started in 2017. Development happened before the foundation even existed. And development will happen even if the foundation runs out of money. This is a decentralized cryptocurrency after all.”

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 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 changes into the LTC code. Adrian Gallagher is one of the core developers and works on a personal branch. These changes are only recorded on the main branch once they are finalized.

Over the past year, there have been a cumulative three commits to the main GitHub repo, litecoin-project/litecoin (shown below), with no commits in the past 90 days. Compared to previous years, 2019 and 2020 has seen a marked reduction in dev activity. However, Litecoin.com announced that Litecoin Core 0.18.1 entered the final stages of testing in October 2019.

Source: Github – litecoin-project/litecoin

In October 2019, Litecoin Improvement Protocol (LIP) 2 and 3 were published, outlining Extension Blocks and MimbleWimble, respectively.

Extension Blocks (EB) are a type of sidechain first proposed by Bitcoin developer Johnson Lau in 2013, and allow for protocol variables that differ from the main chain. Therefore, EBs can have increased block sizes or bring increased programmability and privacy without the need for a hard fork of the entire chain. Each EB is only connected to the corresponding block from the main chain, as opposed to every other block in the main chain. Criticisms include decreased backward compatibility and decreased chain security.

MimbleWimble (MW) uses zero-knowledge proofs and a specific type of transaction mixing to obscure transaction details while still allowing for transaction verification. Adding MW through EBs allows for the opt-in use of transaction privacy on the LTC chain and brings increased coin fungibility. The soft fork will be activated one year from the day the implementation is released. Miners will be able to activate the change early with at least a 75% signaling threshold. A major criticism of private transactions revolves around an inability to audit the total coin supply, allowing for the possibility of phantom inflation.

In December, the Litecoin Foundation announced a fund to support the development of both EB and MW. The fund has a goal of raising US$72,000, to support developer David Burkett over the next year. The fund currently has collected 610 LTC and 0.063 BTC, or nearly US$46,000.

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

On the network side, LTC uses SegWit enabled addresses to both decrease individual transaction size and cost, as well as increase the maximum block size to more than 1MB. SegWit use has increased to over 50% in the past few months and also enables transactions to be used on the Lightning Network, a bi-directional, off-chain, hub-and-spoke payment channel. The LTC Lightning Network currently has 668 channels and the network capacity exceeds 161 LTC, or US$7,500.

Source: Blockchair

The number of LTC transactions per day (line, chart below) has ranged from 20,000 to 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 less than 500 pending LTC transactions.

The average transaction value on the network (fill, chart below) fell dramatically throughout 2018 but increased from December to July. This most recent increase also followed the December to July increase in price. Average transaction values are currently US$3,600, down substantially from a high of ~US$30,000 in November 2017.

Source: CoinMetrics

The network average block size (line, chart below) fell dramatically throughout 2018 and early 2019, and has also decreased since the block reward halving in August 2019. The current average of 10MB per block currently represents a multi-year low, suggesting relatively little on-chain activity compared to the previous two years. Historically, the average block size still remains higher than at any point prior to June 2017.

The average transaction fee (fill, chart below) has fluctuated dramatically with block size, and is currently US$0.033, which is only 3.5% of the current BTC transaction fee. Fees spiked to nearly US$0.16 in May 2019, along with the spike in transactions at that time. Litecoin Core v0.17.1, also released in May 2019, 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 166 and rising, which is well above the historic norm and represents a new all-time high. An NVT below 20 would likely indicate organic and sustained bull market conditions based on chain utility.

Inflection points in NVT can be leading indicators of a reversal in an assets value. An uptrend in NVT often suggests an asset 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), holding near multi-year lows. MAAs remain well above historic levels prior to July 2017. However, LTC has far fewer MAAs than either BTC or ETH but over 3x more active addresses than Ripple (XRP).

The top 100 LTC addresses currently hold 39% of the available supply, compared to 15% for BTC, 33% for ETH, and 73% for XRP. Most of these top addresses are 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 instances of MVRV above 3.0 have represented all-time highs in price. Currently, MVRV is 1.06, which is inching towards the middle of the range.

Source: CoinMetrics

Since the block reward halving in early August, the hash rate has dropped by nearly 70%. Hash rate and difficulty rose substantially from mid-December 2018 to early August 2019, with both reaching record highs.

Of the 84 million LTC to ever exist, 76.66% have been mined. Inflation per year currently stands at 4.17% and is set to decrease to 1.80% after the next block reward halving in August 2023. The network currently has 1753 active public nodes, most of which reside in the United States and Germany. Only 53% of these nodes are running the latest version of Litecoin Core.

Source: BitInfoCharts

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

Renewable energy sources around the world, including hydroelectric and geothermal power, bring electricity prices for most mining farms to US$0.04 cents/KWh or lower. Most Scrypt ASIC miners (shown below) are slightly profitable at an electricity cost of US$0.04 cents/KWh.

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) and Japanese Yen (JPY) pairs hold no premium over the USDT pair.

LTC has continued to gain exchange listings, custody solutions, and exposure over the past two years, including new LTC pairs on BitGo, Bittrex, BlockFi, Binance, Binance.US, BTSE, CMC markets, Coinbase, DragonEX, EscoDEX, FXCM, Gemini, Huobi, OKEx, Poloniex, SoFi, QuantaDEX, Voyager.

Litecoin.com also added a buy function with pairs in USD, EUR, and GBP, along with a logo redesign. The Litecoin Foundation released an updated version of the LoafWallet at the end of October.

Worldwide Google Trends interest for the term "Litecoin" increased slightly in June 2018, but has since declined by an equal magnitude. Google Trends interest has not increased significantly over the past two years.

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

A roadmap for potential trend changes can be deduced using Exponential Moving Averages, Volume Profile of the Visible Range, and the Ichimoku Cloud. Further background information on the technical indicators discussed below can be found here.

On the daily chart for the LTC/USD market, the 50-day Exponential Moving Average (EMA) and 200-day EMA crossed bullishly on February 12th, ending a 170 day bear market. The previous bull trend lasted a mere 150 days, peaking before the LTC halving.

The 200-day EMA is now just below the current spot price, at US$62, and should act as support in the near term. The Volume Profile of the Visible Range (VPVR) currently shows resistance between the US$78-US$90 range and strong support between the US$50-US$60 range. There no active bullish or bearish divergences at this time

Open interest on Bitfinex for the LTC/USD pair is 91% long with longs decreasing slightly over the past month and shorts holding flat (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 the spot price quickly higher.

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.

On the daily chart, Cloud metrics are bullish; the spot price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and the Lagging Span is above the Cloud and above price. This is only the second bullish Kumo breakout since early 2018. The previous Kumo breakout led to a 230% bull rally.

On the LTC/BTC chart, the spot price has historically been unable to maintain a price above 0.02 BTC but has remained above 0.005 since March 2017. The daily chart recently flipped bullish for the first time since early 2019, with the spot price above the 200-day EMA and daily Cloud. Similar to the LTC/USD pair, a bullish 50-day and 200-day EMA cross is possible within the next few weeks.

A high volume VPVR node, at 0.0088 BTC, should act as strong resistance on any further rise. Open interest on Bitfinex for the LTC/USD pair is 70% long. There are no active bullish or bearish divergences at this time.

Conclusion

Fundamentals show on-chain activity continuing to slow over the past two years. NVT has made a new all-time high, suggesting decreased on-chain utility per market cap dollar compared to previous periods. MVRV is rising and sits in the middle of historic range. Hash rate reached a plateau leading into the August halving and experienced a nearly 70% reduction, and mining profitability remains at all-time lows.

Developer activity on the main Github repo has been nearly non-existent over the past year, although a Litecoin Improvement Protocol for Extension Blocks and MimbleWimble was released at the end of last year. Together, these changes would allow for a soft fork enabling private transactions and increased coin fungibility. However, Extension Blocks and MimbleWimble could also introduce variable consensus rules with decreased chain security, as well as hidden inflation.

Technicals for the LTC/USD pair have flipped bullish for the first time since June 2019. Trend metrics including the 200-day EMA and Cloud show a nascent bullish trend. Significant near term support sits between US$50 to US$60, based on the historic volume profile, with near term resistance between US$70-US$90. Further upside targets should also find resistance at the US$100 psychological zone and the previous local high near US$178.

Technicals for the LTC/BTC pair have also flipped bullish for the first time since June 2019. Trend metrics including the 200-day EMA and Cloud show show a nascent bullish trend. Significant upside resistance sits at the 0.0088 BTC zone, based on the historic volume profile. The trend will remain bullish so long as price maintains a price above 0.066 BTC.