Synopsis: This article puts cryptocurrency speculation under the microscope. It explains that speculation is a fact of life for all types of traded assets (not just crypto). The article also provides insight on why it happens, historical context to signal vs. noise, and shows that speculation doesn’t matters too much in the long run.
Cryptocurrency Speculation – We’ve Seen This Story Before
Those who engage in Bitcoin criticism (as well as criticism of other cryptocurrencies) will often be heard saying some variation of:
‘Cryptocurrency is just a vehicle for speculation’.
First, a definition: Cryptocurrency speculation is buying into crypto with the hope of making a quick profit. Speculators are betting on the price increasing. They may not know very much about the characteristics of the actual crypto they’re buying… and indeed, they may not really care. The speculator is satisfied so long as they can later sell their holdings to somebody else for a higher price than they bought in at.
Speculation takes hold when prices are trending higher. Seeing the prices increasing, new buyers enter the market with the hope of getting in on the action. This, of course, creates even more demand, sending the price even higher in a self-reinforcing feedback loop. These new cryptocurrency speculators don’t want to miss out when everybody else is making a fortune! And so a cryptocurrency bubble ends up forming.
But speculation always ends the same way – with a painful crash, and a great deal of regret at the madness which got everyone into this mess. Everyone swears to themselves that it will never happen again… until the next speculative frenzy takes hold, and all is forgotten. As the cycle repeats itself, people will confidently assert: “This time is different.”
But when it comes to cryptocurrency speculation, there is nothing new under the sun. If the history of financial markets has taught us anything, it should be this: Anything is fair game to be speculated upon if speculators think that there’s a potential gain to be had.
Here is a (very incomplete) list of assets that speculators have influenced:
- Derivative securities
- Foreign exchange
- Real estate
- Gold and other commodities
- Fine art
- Sports memorabilia
- Tulips (yes, tulips!) Here’s the story of the 17th century Dutch Tulipmania.
- Mortgage-backed securities
- Credit default swaps
- … and cryptocurrency.
Cryptocurrency speculation is just a manifestation of something that humans have done throughout recorded civilization: gambling on the future, in the hope of making a quick gain.
Pay Attention To The Signal, Not The Noise
One of the key things to realize about speculators, whether it’s cryptocurrency speculation or anywhere else, is that they have a very short time horizon. They want to get in and get out within months, or at the very most, a few years.
Let’s look at another instance of speculation using the Internet retailing giant Amazon.com. Amazon has a lifespan as a publicly-listed company of more than twice that of Bitcoin. Amazon had its initial public offering in 1997. Bitcoin went live in 2009.
In the late 1990’s, Amazon’s stock price was bid up to what were (at the time) astronomical levels. The company had never made a profit, and it had all the hallmarks of a bubble.
Then, the dot-com bust struck and the pessimists took over. Many were picking that Amazon would be crushed by the incumbent brick-and-mortar retailers like Borders and Walmart as they started up their own online offerings.
Here’s how Amazon’s stock price played out from 1997 through to 2002 (*note, the stock price has been adjusted for stock splits that have happened since):
It was a textbook instance of hysterical speculation, followed by a spectacular crash.
But here’s the thing: we need to look at this episode speculation in its proper context.
What happened to Amazon’s stock price in the long run imparts an important lesson: Don’t pay attention to the noise. Instead, pay attention to the signal.
- Noise = Speculation, short-term inflation and deflation.
- Signal = What’s really going on. The long-term bigger picture.
As we now know, the “signal” in Amazon’s case was that the Seattle-based online retailer was on the pathway to world domination – it would become “The Everything Store”. The speculators had their fun (and their pain) in the dot-com bubble, but what mattered far more was the company that Jeff Bezos and his team were building. In the long-run, the signal dominates the noise, every time.
Cryptocurrency observers should take careful note. Although cryptocurrency speculation is rife, in the end, it’s just noise compared to the true story: decentralization, disruption of the financial system, permission-less transactions, privacy, and access for all. That’s what’s going to eventually matter for crypto value.
There Is Plenty More Cryptocurrency Speculation To Come
One thing is for sure: the future of cryptocurrency will include speculation, bubbles and yes, a crypto crash here and there. It’s going to be a bumpy ride, so buckle up. Your cryptocurrency portfolio will just have to ride the gyrations like a cowboy on top of a bucking bronco.
In this regard, cryptocurrency is no different from any other marketplace. Remember the long list of assets from earlier in the article? Speculation will also continue to be a fact of life for real-estate, stocks and fine art. But that doesn’t mean we should stop building houses, creating companies, or painting pictures.
Cryptocurrency speculation isn’t something that can be regulated out of existence for the very simple reason that speculation itself is a result of fundamental human nature. In the climactic scene of the the iconic 1980’s film Wall Street, the movie’s main antagonist uttered:
“Greed is good.” – Gordon Gekko
But greed isn’t good. Nor is greed bad. Greed just is. We can’t expect speculators to stop being greedy – we just have to learn to live in a world where they are always going to exist, and learn to pay attention to the signal instead of the noise that those speculators create.
Just as Amazon’s signal has ended up dominating the effects of short-term speculation, so too will crypto. Therefore, while the effects of cryptocurrency speculation may dominate the day-to-day news-cycle obsessed media… in the grand scheme of things, what is far more critical is the strength of the underlying technology. And therein will be the real story of the next 10 years and more.