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Bitcoin’s Halving – Good or Bad News for Investors?

The disappointing performance of the global financial markets this year has left many investors looking for better opportunities. Therefore, an investment like Bitcoin may catch their eyes. After all, its price has jumped from about $430 in January to about $660 today (July 14), a growth rate of slightly more than 50 percent.

But whether Bitcoin is a good financial investment has long been debated. Some argue that Bitcoin, as a virtual currency, is used for mainly illegal activities, such as money laundering. If so, the government will most likely take steps to ban it, which would make BitCoin lose its value as it would be excluded from legal exchanges. Obviously, such a move would make BitCoin an extremely poor investment choice.

In addition, investors who buy and sell bitcoins in hopes of a high rate of return must bear an extremely high risk. The chart below shows that the price of Bitcoin has fluctuated widely over time.

Since 2013 when Bitcoin started to gain value, the price has been extremely volatile. One bitcoin was worth almost $950 by the end of 2013, but dropped to about $200 a year later. Despite Bitcoin’s gain of about 50 percent this year, it would not be surprising to see the price drop again.

On top of the extreme volatility, Bitcoin just experienced the second halving in its history on July 9. That means the reward for BitCoin mining has been cut in half. Mining bitcoins is a process of solving a complex mathematical problem by consuming huge computing resources.  Once the problem is solved, the miner gets bitcoins as a reward. After the halving on July 9, rewards of solving a mathematical problem have been reduced from 25 to 12.5 bitcoins.  As a result, fewer people will find BitCoin mining worth their while. Therefore, bitcoins will be created at a slower pace from now on.

Since the halving was setup as an expected event, Bitcoin value dropped 5 percent on the day before the halving. But in the longer run, investors believe the price would likely rise due to the reduced supply. However, speculation and the concerns about illegal usage have made Bitcoin a suspicious financial investment instrument.

Thus, even though Bitcoin is posting high rates of return this year, investors would be wise to take a broader view.

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