Speculation can be a profitable financial process for some, while most investors view speculation as a kind of irresponsible behavior, something that closely resembles gambling. However, the main difference between speculation and gambling is that the former is done with the investor's own money, rather than with personal funds.
What is speculation?
In a classic financial context, speculation consists of trading a financial instrument that involves high risk, in the expectation of high or significant returns. This method aims to take maximum advantage of fluctuations within a financial market.
In short, the investor assumes the risk and hopes that the profits made will outweigh the potential loss. At the beginning of this article, we pointed out that some investors consider speculation to be a form of gambling. This is not entirely true, as gambling usually also involves an element of skill. Furthermore, gambling is not considered an investment, since chance plays a very important role.
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In speculation, even if the risks are high, with enough effort, work and inspiration, an investment can become a success. To be more precise, when it comes to speculation, all investors mitigate the aspect of chance as much as possible.
Effects on price volatility/stability
While a bet may seem like speculation at first, it has the power to influence price stability. For example, valuation based on speculation can drastically change as assumptions about how much a project will be worth in the future change. Speculation can also create demand for a product at a huge potential price range.
Is cryptocurrency speculative?
Before answering that question, it is important to note that for most of their life and history, cryptocurrencies have been seen as being primarily speculative, hence their extreme price volatility.
One could argue that cryptocurrency is speculative, but that is not always the case. In short, very few cryptocurrencies have entered a phase of practical use. Generally, crypto projects that are under active development and refinement are considered speculative projects. However, there are some speculative stages that a crypto project needs to go through in order to shed its “speculative tag.”
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The speculative stages
The first thing we need to understand is the fact that speculative value can take many forms. In short, value is not binary, it is never entirely speculative, nor is it entirely practical. As we know, crypto and blockchain projects start with the creation of a whitepaper. At this stage, a project is mostly speculative, as investors are speculating whether the technology described in the paper will ever exist.
After this stage, investors continue to speculate on the technology, proving its value and usefulness, while remaining within the use cases for which it was created. At this stage, practical use in commerce comes into play. If a project can be commercially useful, it is one step closer to practical use. Even when practical use is achieved, speculation does not stop. The next phase of speculation involves checking whether or not the project’s technology will become dominant in its specific field.
Speculation involves one more step and is related to broad commercial use outside of a product’s narrow field of expertise. Unfortunately, most crypto projects usually fall between the first three phases and never enter the practical use phase.
For example, Bitcoin has managed to reach the third phase since its consistent use as a payments system, which is exactly what it was designed to do. Bitcoin’s never-ending scalability issues have prevented the project from reaching its true practical use as it seeks scaling improvements through various off-chain solutions such as the Lightning Network.
Ethereum is pretty much in the same situation where it is still proving its viability and struggling to achieve practical use, that of a complex and practical smart contract space. However, Ethereum has managed to reach the fifth step by proving all these years that it is the ideal environment for ICOs.
It seems like most crypto projects are currently locked in a race to become the first commercially viable cryptocurrency. Most of these projects aim to see their value derived from commercial use rather than speculative use. It’s also important to note that investors play a very important role in the cryptosphere. At the heart of the crypto market are investors who hope to turn relatively small investments into piles of digital cash. These investors are also known as speculators.
While some invest based solely on their gut instincts, others have above-average technical knowledge of the crypto market. All investors are speculators in one way or another. At the end of the day, the crypto market is probably the best high-risk, high-reward investment area.
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Final Words
Cryptocurrency may have started out as something that wasn’t taken seriously by many, but today, it has made its way into some of the world’s leading financial institutions. Speculators play a very important role in the crypto space, as they absorb the risk that is usually associated with crypto investing and eventually help make the market more accessible to casual investors.