If you’ve ever discussed your cryptocurrency investments with friends or family, you’ve probably come across the phrase “That’s not investing, you’re just speculating!”
So what is the difference? Aren’t they one and the same? Does it really matter?
For most people, the distinction between investing and speculating comes down to the risk, reward, and time-frame.
Investing, by definition, is to:
“put money into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit.” — Oxford Dictionary
Investors are typically in it for the long game. An investment is supposed to be held for years or decades, so the decision to buy into a certain company or asset is a significant one. As such, a lot of time goes into research and analysis before an investor decides to commit his money to a company or asset. They must ensure that it is sound and safe, and that the likely return is worthy of the risk being taken.
In general, investors will place their money in lower risk investments that naturally come with lower returns over a long time-frame.
Benjamin Graham, in his book The Intelligent Investor, lists these as rules of investing:
- You must thoroughly analyze a company and the soundness of the underlying business before you buy it’s stock
- You must deliberately protect yourself against serious losses
- You must aspire to adequate, not extraordinary, performance
If we break this down, we can see Graham advocates thorough analysis and due diligence before purchasing a stock. For stocks, this often involves fundamentals analysis, quantitative analysis, qualitative analysis, and an examination of intrinsic value.
Graham also preaches humility and careful consideration. This means not taking excessive risk (and thus protecting yourself from serious losses), and being content with a decent return.
By contrast, speculating usually involves much higher risk and reward over a shorter time-frame.
“Speculate: to invest in stocks, property, or other ventures in the hope of gain but with the risk of loss.”
If we look at it from a broader, non-financial point of view
“To form a theory or conjecture about a subject without firm evidence”
Obviously this applies to a lot of the cryptoverse. There are countless traders out there who flip coins without looking into the fundamentals at all, and countless ‘investors’ sitting at home throwing their money at every coin that has a catchy name and flashy website.
But speculating is not something that is limited solely to cryptocurrencies. Day traders on the world’s largest currency and stock markets are speculators, scalping for small percentage gains each day based by capitalizing on market inefficiencies and fluctuations. ‘Investors’ in small-cap mining companies are also speculators, betting big on a newly discovered field that has little guarantee of yielding sufficient production or returns.
Investors vs Speculators
So which party do you belong to? Are you a speculator or investor? Does it matter?
It is possible to invest and speculate with cryptocurrencies. It simply comes down to the approach you adopt when looking at putting some money into the market.
An investor may find a solid cryptocurrency project that ticks all the boxes in their research and appears undervalued, and they buy with the aim of holding long-term. These sorts of projects are the ones that will shape the future. The next Apple, Amazon, even the Internet 3.0. These sorts of investors do their due diligence (DYOR in the cryptoverse or ‘do your own research’), and are in it for the long game.
Does the project have a real use case? What is the target market size? Would you use this as a customer and is it a fair price? Are there any competitors? Who is in leading the team? Does blockchain actually benefit the project?
Obviously, regardless of the amount of research undertaken, any investment in cryptocurrency will never have the safety of stocks or more mature regulated markets.
But who is to say that a large cap cryptocurrency project is riskier than a small cap graphite mining company in Africa? Both are serious growth markets; blockchain is going to shape the future and disrupt many industries, whilst the development and reliance on lithium-ion batteries will push the demand for graphite and other precious metals.
So who are the speculators in the cryptocurrency market?
Traders look to capitalize on the inefficiencies and daily fluctuations in the market, with many small gains adding up to a big gain.
If you’ve invested in stocks or ETFs before, you’ve probably come across the notion of ‘time in the market’ beating trading. In the world of stocks, I agree that is is difficult for the average Joe to beat the market by trying to pick the right trade over and over. But in the cryptocurrency market, the daily volatility and reactive nature of the market makes it much more amenable to trading.
There are many forms of trading, each with different risk-reward ratios dependant on the time-frame and goals. In general, the longer the time-frame the lesser the risk. Day-trading is perhaps the hardest skill to master with the greatest risk, then there are the swing and momentum traders, those that look at retracements or breakouts, reversals, pivot points, the list goes on.
But you get the idea. There are many ways to trade (and speculate), each with different risk and reward.
So which is the best way to invest in crypto?
As that kid on the Ol El Paso ads wisely once said, Porque no los dos?
Why not split your portfolio into investments and trades? You can still do your due diligence and go slow with your research into individual projects for your long term holds, whilst trading with a small portion of your portfolio on the side!
If you think about it, you are diversifying on another level. When the market is pumping, you win from your investments. When the market is tanking, you win from the funds you are able to swing trade in a bear market.
Here’s how it works. Split your funds into:
- Investment: 80–90% of funds. Within this investment portfolio, you diversify by splitting your funds between 5, 10, 20, however many projects you wish to follow. You research deeply into each project and look at the fundamentals.
- Speculation: 10–20% of funds. Within this portfolio, you still diversify by splitting funds into 10 allotments, we call these positions. Keep these positions small ($500 each if you have a small total portfolio, $1000 if you have a larger portfolio). Learn to trade with these funds.
By doing this, our goal is to:
- Invest: pick long term gainers and forget about fluctuations in the market. These projects will have good and bad days but that doesn’t matter as you’re in it for the long haul. Welcome to HODL.
- Speculate: cash in on small gains and capitalize on the nature of the crypto market. This will build your sats (satoshis or your stack). This is important as this is where you continue to make money when in a bear market.
Interested in learning how to trade?
Start out by learning some technicals analysis and getting on a good Telegram or Discord channel. It will open your eyes to a totally different style of investing (speculating, making money, call it what you will). You will learn to leave behind a lot of market noise and look more at charts, trends, and numbers.
Your decisions for both investing and speculating will begin to be informed by each other. You will become a more well-rounded and learned investor-trader.
I’ll be writing a few words about how to get started with trading next, so stay tuned!
Putting any money into the cryptocurrency market really is speculating, but the degree to which we do so varies based on our approach. You can still adopt an investing approach by going long on solid projects, and you can speculate by looking for small gains in an inefficient market.
The way to minimise risk in any investment is through diversification. By adopting a strategy that utilizes both an investing and speculating approach, you are able to capitalize on gains during bull markets and mitigate losses during bear markets.
To put a spin on the oft used phrase;
“Don’t speculate with more than you’re willing to lose.”