1. Investing vs. Speculating

In this post we will look at Benjamin Grahams view on investing vs speculating, where cryptocurrency might find itself, and what type of mindset to have as we move forward.

Graham talks about investing vs. speculating in a distinct and clear way which we can apply to the current crypto currency market. (Graham, p.19).

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative” — Graham

Investing is placing money by a specific formula which statistically will not lose you money, and on average deliver the expected return. Speculating on, the other hand, is akin to gambling, a “hope” that the price will rise and you will come out on top (Graham, p.37).

Where then is cryptocurrency in regards to speculation vs. investing? The answer is unfortunately that it is purely speculative. There is no way in which we with a high certainty can say “the prices will rise”, neither in measuring some sort of value flow from each individual security nor from the industry as a whole.

Stocks and bonds are valued based on how much money they generate for the owners. Dividends is a proven concept which has been around for centuries. Growth of the company, current levels of dividends and expected growth of them, are all integral variables in how stocks are valued. The bond sector, likewise, have time-tested ways of how to calculate their value for an investor. Most importantly, when these numbers change, we have tested models for how the market reacts and security prices change.(Graham, p. 45)(Malkiel, p. 329)

In crypto currency there is no proven way to estimate a value of a token or coin in order to decide if it is currently under- or over valued. When you put money into any crypto currency you hope that it will increase in price.

As there are no proven methods of estimating the value of coins we must accept that crypto currencies are in current times of a speculative nature.

Having accepted that we are at the core speculating, we note that Graham goes on to argue that there is intelligent speculating as well as intelligent investing. While speculating, one must always have this in mind (Graham, p.21):
1) Never speculate when you think you are investing
2) Never speculate seriously instead of as a pastime when lacking proper knowledge
3) Never risk more money than you can afford to lose

There is still tremendous risk in the cryptocurrency space compared to regular securities. Be aware that it is very risky to put a lot of money into this asset class. Do not believe you can make professional results from cryptocurrency unless you are at a professional level (knowledge and experience wise). Do not expect to get rich quick. Do not invest money you cannot lose.

If you still would like to put in some money into crypto currency, start with a quick look at what strategy the books could recommend.