- Bernard Baruch, an American financier, declared this speculation finds its origin in the Latin word “to speculate”, which means to spy and observe. He defined a speculator as a man who observes the future and acts before it happens.
It is essentially wrong to think that crypto has generated speculation. While it is true that speculation has been the subject of much debate, it has its place in the portfolio of investors.
If we look through the lens of the efficient market hypothesis, we will conclude that the market is always fairly priced and speculation is unreliable. Even some market experts claim that speculation equals gambling.
From a different perspective, a healthy market, as well as the entire financial system, does not only consist of hedgers and arbitrageurs, but also includes speculators. Since a market fluctuates according to a number of variables, there is an opportunity for capital growth.
Sometimes it can be hard to draw a line – the weirdest thing about the intersection between gambling, speculation and investing is that the same asset can theoretically be either an investment or a bet.
The main objectives of the players revolve around winning the bet, without any additional elements. On the other hand, the strategy, planning ahead, and market watch behind an asset determine whether you play, speculate, or invest.
John Maynard Keynes, a well-known economist, once said that speculation knows the future of the market better than the market itself. The concept can be defined as the act of engaging in a financial transaction that carries a serious risk of loss of value, but also harbors the potential for significant monetary gain.
It makes perfect sense – if there was no expectation of profit, there would be no motivation for anyone to engage in such activity.
For example, you can buy shares of a high-quality company with expected long-term upside potential. In other words, you have just made a “safe” investment. On the other hand, a speculator would rather look for opportunities where significant price movements are likely to occur.
Innovation gave birth to speculation. In the 1860s, technological developments in the fields of communication, transport and storage added to the creation of world markets for many products such as cotton or wheat. The economic needs of many companies have influenced the growth of the stock and securities market.
As markets became more complex, professional speculators emerged. At first, it was thought to be just another name for the game. However, research and scientific literature from the last decade of the 19th century argued in favor of speculation focusing on its constructive side and the nature contemporary commodity markets.
Economists have played a vital role in convincing policy makers that speculation is more than a bunch of mindless inconvenience; they succeeded in presenting its beneficial effects against a hostile public opinion. This change introduced certain speculative financial products such as futures contracts, used for short selling purposes.
Speculators focus on predicting price changes and profiting from asset price swings. They generally operate within a shorter time frame than a traditional investor.
Unlike hedgers as risk-averse investors or arbitrageurs who try to capitalize on market inefficiencies, speculators use rapid portfolio diversification by buying stocks or futures with the expectation that they will rise. in a short period of time, such as days, weeks or months.
There are different types of speculators in the market. Individual traders can be speculators if they acquire a financial instrument for short periods with the intention of profiting from price changes.
Proprietary trading companies known as prop shops can be speculators because they use leverage to buy securities and earn profits from rising and falling prices. The same goes for market makers who take advantage of the differences in spreads between bids and asks.
It is important to understand that speculators are ordinary players in all markets. However, it can be difficult to understand the main difference between calling someone an investor versus a speculator.
Keep reading, an explanation is just around the corner.
Let’s start with the definitions – while an investment refers to the acquisition of an asset with the aim of generating income or appreciation in the future, speculation is the undertaking of a financial transaction which involves a substantial risk of loss of value, but with the expectation of a large profit.
As you can see, the difference is in the term “risk”. Although it is obvious that investing also involves some level of risk, the possibility of losing the entire amount is what differentiates these two concepts.
For example, an investor decides to buy 10 successful companies with a plan to hold their shares for at least 10 years with the projection that they will continue to perform well in the market. Although there are some risks, it looks more like a safe bet in the stock market.
Speculators are more dynamic; they normally use trading strategies telling them when to buy and when to sell. Investors can turn into speculators if caught up in the frenzy of market ups and downs.
Popular investment choices include bonds, US Treasuries, mutual funds, and stocks. Futures, options, cryptocurrency, start-ups, and foreign currencies live in speculative territory.
In the crypto world, the speculative nature is more visible due to the state of the market. It is a very volatile market, so cycles of hope and disappointment are more extreme than with its traditional counterparts.
Quickly moving from bull to bear markets and crypto winters, speculation periods turn out to be longer. Since the crypto market is still in its infancy, speculative periods should follow the process that a particular technology goes through before reaching mass adoption.
As speculation periods are longer, the general public perceives the whole market as unreliable. However, speculation, whether in the crypto or traditional markets, has produced overnight successes, average profits or total losses.
For example, a Tulip Mania hype took place in the 1630s in Holland. Tulip prices quickly skyrocketed, especially those that were rare or had interesting colors. Tulip growers began selling their bulbs at unreasonable prices, pushing the market into a frenzied state.
In short, the demand for tulips fell as quickly as it appeared. Speculators who saw a good opportunity found themselves empty-handed.
A logical question arises: why is crypto speculation bad and tulip speculation forgotten? Perhaps because a lot of time has passed, tulips have managed to become a stable market. We often forget that crypto is happening now, that it’s all the rage, along with rapidly emerging technological innovations and a currently unregulated cryptocurrency market.
The problem is that the users are not sufficiently educated; crypto newbies are vulnerable to security and investment risks. Speculation is a technique that requires a high degree of knowledge and monitoring of the market before putting anything into play. Otherwise, it would be an obvious bet.
Speculation and gambling are risky activities because you can never really know which way the wind is going to blow. In this sense, they may be siblings, but speculating and betting are certainly not twins.
If these two were synonymous, we could compare crypto speculation to the game of poker. It helps if you get a good hand and are good at counting cards. Therefore, you have a better chance of profiting from crypto speculation if a cryptocurrency maintains a good reputation and you can follow the market closely.
Lack of regulation is not the main difference as the game is heavily regulated and follows many rules around the world. Casinos and sports betting are subject to regulations in each state.
The original cryptocurrency Bitcoin, like any type of cryptocurrency, can be used for gambling but it is indeed a decentralized currency. For example, the US dollar is a Fiat money; you can play with it, but you can also buy stocks, groceries or real estate.
The real difference comes from the traditional definition of speculation – it is closer to risky investing than gambling. What crypto traders do sometimes looks a lot like gambling, but on a higher level it is speculation .
Carlota Perez, economist, demonstrated the link between financial bubbles and technological development. At significant technological milestones in history, asset bubbles have played a critical role in shaping how society integrates new technologies into the economy.
As new technology fuels the hype, large price swings and dynamic trading take a stand. All the money generated by investor speculation is directly invested in new projects. This ultimately adds up to establishing the technology in the market.
The crypto bubble market is often compared to the famous dot.com bubble of the 90s.
THE The dot.com bubble refers to a rapid increase in swings in US tech stocks generated by investments in tech companies in the late 1990s. Value rose exponentially during the bubble, but entered a bear market in 2001.
The bubble caused the crash of several companies and much attention was paid to the losses of speculative investors due to unsuccessful projects.
In contrast, there has been less discussion about how the financial capital market has unblocked and how the money invested in the middle of the bubble has translated into the development of fiber optic cable, algorithmic research and other important technologies.
Many financial experts have said that crypto is the new bubble dot.com. The fact is, the cryptocurrency market is driven by technological advancements and speculations as two major factors driving its growth.
A difference between cryptography and the inventions of the late 1990s can be spotted in the fact that crypto-related products are mostly based on open source code. When creators don’t need to ask permission to create something new, it’s a powerful tool for success in the marketplace.