Cryptocurrencies have become the most popular trend in terms of investments since the beginning of 2020, as the prices of most tokens have skyrocketed and created fortunes for several early investors. Even with a dip in the market over the last few months, most cryptocurrencies are several times their value from just a year ago, and while the demand for cryptocurrencies remains high, the speed of the dip has brought up old concerns and questions around crypto investing. One of the biggest arguments against cryptocurrency investing has been that it is too volatile – this is also the reason why it is considered not appropriate as an alternative to fiat money, as the value of these tokens can rise or fall by incredible amounts in the space of a few hours, which makes it impossible to assign value to them in exchange for goods and services. This volatility has also led to questions around whether buying cryptocurrencies is the same as an investment in traditional asset classes, or if it is more similar to gambling, and we will try and look at this issue here.
One thing must be made clear at the outset – just because there is risk involved does not make investing gambling. The entire premise around investing is to try and receive the return appropriate to the level of risk that you have taken in your investing decisions – no investment is without risk, it is simply the level of risk that differs. The primary difference between gambling and investing is an investor will use tools of diversification to mitigate risks and decrease the chance for loss. A gambler is typically all-in with a singular lever dictating whether they win or lose. With regard to cryptocurrencies, the problem arises when you only hold different types of cryptocurrencies – this does not diversify your risk enough since you are still invested in the same asset class. Investors have very specific goals around a rate of return, time horizon, and risk tolerance itself. Additionally, investors generally have specific goals for specific accounts whether the money is meant for retirement, college, or some other time-determined event. Gambler’s primary goals revolve around winning the bet, without any additional structural elements or constraints.
The strangest reality about the intersection of investing and gambling is the same asset can theoretically be either an investment or a gamble. It’s the strategy and planning behind the asset which decide whether or not you’re gambling. If you look at a crypto investment as an ‘all or nothing’ decision, chances are that you are considering it to be a gamble. The personal and financial circumstances of each individual will also determine their ability to take bigger risks and even potentially gamble. For instance, a healthy emergency fund, a properly funded retirement strategy, and the absence of consumer debt make investing excess funds in speculative vehicles much more tolerable. However, it’s tough to accomplish this level of stability when your entire net worth is tied-up in something as volatile as crypto, which is why the need for diversification arises again.
If you have managed to create some wealth through the crypto boom of the last year, well done, but consider using some of the value of your crypto holdings to create more conventional stability. By doing that, you allow the rest of your crypto holdings to become less of a gamble and more of a specific investing strategy. You’ll still have the theoretical upside of crypto, but you’ll also have a more reliable base for your financial planning strategy. You need to come to terms with the fear of missing out (FOMO) which inevitably comes with switching from a speculative investing strategy to a more prudent investment strategy as well.
The basic point being made here is that investing and gambling can be remarkably similar – it is the strategy and mindset behind both activities that determines which is which, and this is the single most important thing to remember when putting your money into any asset, whether crypto or traditional asset classes.