Speculation can be a lucrative financial process for some, while most investors view speculation as a kind of irresponsible behavior, something that looks a lot like gambling. However, the main difference between speculation and gambling is the fact that the former is done with investor money rather than personal funds.
What is speculation?
In a classic financial context, speculation consists of negotiating a high-risk financial instrument, pending high or significant returns. This method aims to take full advantage of the fluctuations within a financial market.
In short, the investor bears the risk himself and hopes that the profits obtained will outweigh the potential loss. At the beginning of this article, we pointed out that some investors consider speculation a kind of gambling game. This is not entirely true since the gambling game usually also involves an element of skill. Moreover, gambling is not considered an investment because luck plays a very important role.
In speculation, even if the risks are high, with enough effort, work and inspiration, an investment can be a success. To be more precise, when it comes to speculation, all investors attenuate the casual aspect as much as possible.
Effects on volatility / price stability
Although it may seem a gamble in the beginning, speculation might have the power to influence price stability. For example, valuation based on speculation can change dramatically as a hypothesis on how much a project will be worth in the future. Speculation can also create demand for a product at a wide potential price range.
Is cryptocurrency speculative?
Before answering this question, it is worth noting that, for most of their lives and their history, cryptocurrencies have been considered mostly speculative, hence their extreme price volatility.
It could be argued that cryptocurrency is speculative, but it is not always the case. In short, very few cryptocurrencies have entered a phase of practical use. Typically, encryption projects under development and inward processing are considered speculative projects. There are, however, some speculative steps through which an encryption project must be submitted in order to eliminate its "tag of speculation".
The speculative phases
The first thing to understand is the fact that speculative value can take various forms. In short, value is not binary, it is never completely speculative, nor completely practical. As we know, cryptography and blockchain projects start with the creation of a white paper. At this stage, a project is mainly speculative because investors are speculating if one day the technology described in the document will exist.
After this stage, investors continue to speculate on technology by demonstrating its value, its usefulness, retaining in the cases of use for which it was created. At this stage the practical use in commerce comes into play. If a project can prove commercially useful, it is a step closer to practical use. Even when the practical use is reached, speculation does not stop. The next phase of speculation involves seeing if the technology of the project will prove dominant in its particular field.
Speculation implies a further step and is related to extensive commercial use outside the narrow field of specialization of a product. Unfortunately, most cryptographic projects usually end up staying in the first three stages and never entering the practical use phase.
For example, Bitcoin managed to reach the third stage, from its consistent use as a payment system, exactly to what it was designed to do. Bitcoin's endless scalability problems prevented the project from achieving its true practical use as it seeks to scale improvements through various off-chain solutions such as the Lightning network.
Ethereum is practically in the same situation in which it still demonstrates its feasibility and struggle for practical use, that of a complex, practical and intelligent contractual space. However, Ethereum has managed to achieve the fifth step by demonstrating in all these years that it is the ideal environment for ICOs.
Today, it seems that most cryptographic 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 is also important to note that investors play a very important role in the cryptosphere. At the heart of the cryptographic market, there are investors who are hoping to turn relatively small investments into heaps of digital money. These investors are also known as speculators.
While some invest only on their instincts, others have a technical knowledge that is superior to the cryptographic market average. All investors are in one way or another speculator. At the end of the day, the cryptography market is probably the high-risk and high-gain investment area.
Finally, speculation actually helps to advance the cryptography market. It is important to keep in mind that speculators are actually investors who "feed" the market, which provide capital for projects. Speculation, as a financial instrument, helps to bring investors who otherwise do not know or care about the cryptocurrency.
Cryptocurrency may have started in life as something that has not been taken seriously by many, but, nowadays, it has found its way into some of the world's leading financial institutions. Speculators play a very important role in the cryptographic sphere as they "absorb" the risk usually associated with encrypted investment and ultimately contribute to making the market more accessible to occasional investors.