What Is Speculation? How Does It Relate to the Cryptocurrency Market?
Speculation can be a lucrative financial process for some, while most investors see speculation as a sort of irresponsible behavior, something that resembles gambling very closely. However, the main difference between speculation and gambling is the fact that the first is done with investor money rather than personal funds.
What is speculation?
In a classic financial context, speculation consists of trading a financial instrument involving high risk, in expectation of high or significant returns. This method aims to take the maximum possible advantage from fluctuations within a financial market.
In short, the investor takes the risk upon him or herself and hopes that the profits gained will outweigh the potential loss. At the start of this article, we pointed out that some investors consider speculation a sort of gambling. This is not entirely true since gambling usually also involves a skill element. Furthermore, gambling is not considered investment since chance plays a very big role.
In speculation, even though the risks are high, with enough effort, work, and inspiration, an investment can turn out to be a success. To be more precise, when it comes to speculation, all investors mitigate the chance aspect as much as possible.
Effects on price volatility/stability
As much as of a gamble as speculation might seem at first, it does have the power to influence price stability. For example, speculation-based valuation can change drastically as assumptions on how much a project will be worth in the future. Speculation can also create demand for a product at a huge potential range of prices.
Is cryptocurrency speculative?
Before answering this question, it’s worth noting that, for most of their life and history, cryptocurrencies have been viewed as being mostly speculative, hence their extreme price volatility.
One could argue that cryptocurrency is speculative, but that’s not always the case. In short, very few cryptocurrencies have entered a practical use phase. Usually, crypto projects which are in active development and refinement are considered speculative projects. There are, however, a few speculative stages through which a crypto project has to undergo in order to shed its “speculation tag.”
The speculative stages
The first thing one must understand is the fact that speculative value can take various forms. In short, the value is not binary, it’s never fully speculative, neither fully practical. As we’re sure you know, crypto and blockchain projects start with the creation of a whitepaper. At this stage, a project is mainly speculative since investors are speculating whether the technology described in the paper will someday exist.
Past this stage, investors still speculate on the technology proving its worth, its usefulness, holding up in the use cases for which it was created. On this stage, practical use in commerce comes into play. If a project can prove itself commercially useful, then it is one step closer to practical use. Not even when practical use is achieved, speculation doesn’t stop. The next phase of speculation involves seeing whether or not the technology of the project will prove itself dominant in its particular field.
Speculation involves one more step, and it’s related to the wide commercial use outside of a product’s narrow field of specialty. Sadly, most crypto projects usually end up staying between the first three phases and never enter the practical use phase.
For example, Bitcoin managed to reach the third phase, since its consistent use as a payments system, exactly for what it was designed to do. Bitcoin’s never-ending scalability issues have kept the project from reaching its true practical use as it seeks to scale improvements through various off-chain solutions such as the Lightning Network.
Ethereum is pretty much in the same situation as it still proves its viability and struggles to achieve practical use, that of a complex and practical, smart contract space. However, Ethereum managed to reach the fifth step by proving all these years that it is the go-to environment for ICOs.
Nowadays, it seems that most crypto projects are 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 have a very important role within the cryptosphere. At the heart of the crypto market, there are investors who hope to turn relatively small investments into heaps of digital cash. These investors are also known as speculators.
While some invest just based on their instincts, others have above-average technical knowledge of the crypto market. All investors are in one way or another speculator. At the end of the day, the crypto market is probably the ultimate high-risk, high-gain investment area.
Finally, speculation actually helps push the crypto market forward. It’s important to keep in mind that speculators are actually investors who “power” the market, who provide capital for projects. Speculation, as a financial tool, helps bring in investors who don’t otherwise know or care about cryptocurrency.
Cryptocurrency may have started in life as something that wasn’t taken seriously by many, but, nowadays, it has found its way onto some of the world’s leading financial institutions. Speculators play a very important role in the crypto sphere as they “absorb” the risk usually associated with crypto investing and eventually help make the market more accessible for casual investors.