di Ron Tong
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.
Speculating
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.
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