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Investments are often miscorrectly judged on their recent performance whether that be a negative or positive return. Prudent investments with higher risk must compensate their investors with higher returns, which can be measured in volatility. I commonly see people conflate volatility with higher expected returns, which can lead people to jump into speculation or gambling over proper investing. Just because an asset experiences high volatility, does not mean that it can reward the investor with high expected returns.
First I want to lay out some base definitions that I will work from. These definitions are financial definitions, which are what we should work with when analyzing potential investments and assets.
Taking a monetary risk with a negative expected return, but hoping for the less-likely positive result.
Examples include: Casinos, the lottery, betting.
Putting money into assets, usually for shorter time periods, with the hope to trade them higher than previously bought. Alternatively, putting money into assets that do not produce value with the hope of selling them to someone else for more.
Examples include: Short term trading, trading currencies, buying gold, buying commodities, buying collectables.
Putting money into value-producing assets, usually for longer time periods, with the desire to receive returns over time.
Examples include: Buying stocks, buying bonds, buying real estate to rent out, buying a business.
First I should describe more clearly the distinction between speculation and investing. Possibly you would ask, "But what about gold? It is clearly an investment." The distinction I make here is value-producing. Assets need an instrinsic reason to grow in price. For investments, they grow in price due to the value they produce.
A share of stock is ownership in a company that can grow. A bond is debt that earns interest. Real estate generates rent. These assets all produce value in the long-term.
Speculations do not produce value. Gold does not grow from gold. Commodities sit, or sit and rot. Collectables collect dust. Assets traded quickly do not have a chance to grow. Currencies do not generate more of themselves. These assets have no value produced from them. They can only be hoped to be sold for more than they were bought, with no intrinsic reason to the asset for that to be true.
One rule I think about potential areas to put my money is this:
If I play this game forever, will I eventually have nothing?
If the answer is yes, I would lean towards the area being a gamble. If I buy lottery tickets with all my money, and with the winnings from those, I buy more lottery tickets, ad infinitum, will I have any money? No, since the expected return is negative.
If I play this game forever, should I gain anything?
This is a slightly different question. If I cannot fathom a good reason why the area I put my money in should intrinsically grow, but not necessarily reduce to zero, I would call this speculation. If I spend my money on gold and let it sit forever, I will still have the same amount of gold. If I buy a Bitcoin, I will always have one Bitcoin. A holographic, first-edition pokemon card will never reproduce itself. The expected return is 0.
If I play this game forever, should I have increasingly more of what I came in with?
An asset that has an intrinsic reason to reproduce itself and grow should fit this bill. If I buy a share of the total world stock market (ticker symbol VT for example), I own a share of over 9000 companies around the world who are producing real value and investing back into themselves to grow larger and produce more. Over time the world should grow, become more efficient, and value reinvested should lead to overall growth.
Would I Want Everyone to Buy or Sell This?
Or conversely: Do the people who own this want me to buy it too?
If I would want everyone to sell the asset I would like to buy, then I see it as a good investment. I'd prefer for a long-term value-producing asset like the total market's price to be depressed so I could buy more of it. If the stock market cuts in half tomorrow, I'd be elated to be receiving a 50% discount on all of my investments. In the long term, the value produced by these companies will outweigh whatever short term fluctuations in price happen.
If I need everyone else to also buy into the asset for myself to make money, then its returns are based on speculation. If people detest when the asset they hold is discredited, then they rely on the speculation of others to receive more money. It is merely transferring money to the one who bought the asset before, which cannot and will not go on forever. Eventually people will see that the asset will never produce value, and there will be no future buyer to take it off of them. The net return to all investors is 0 on this speculation.
I'll start by tackling lending. Lending can be done with anything, not necessarily a crypto currency. I can lend you 12 beers, with the understanding that I will receive 13 back on a future date. Do these beers have intrinsic income-producing value? No, the loan (or bond) is the value-add here. I will have more beers if I keep doing this in the future. This is kind of nice, since beers are nice for drinking. Let's say I do the same thing with something that has less use. I will give you 12 toenail clippings and you will return me 13 in the future. Do these toenail clippings have value now? If I continue doing this deal, they can produce more of themselves. Generating more toenail clippings for myself isn't really ideal since there's nothing I'd like to do with them.
Lending your crypto currencies can generate more crypto currencies (or traded cash). So you generate more crypto currency through financing debt (where the debt financing is the value-add), but what is the intrinsic value of these crypto currencies? What do they have that no other invention can do? What problem are they solving that can't be trivially reproduced by forking a code base?
Let's say you're staking your crypto currency (https://ethereum.org/en/developers/docs/consensus-mechanisms/). Essentially you are putting up collateral to agree that you will verify transactions on time and correctly. If you are found defecting, you lose your collateral (your stake). This staking and agreement to do work is used to validate transactions in the system, as well as generate new blocks of the currency, which will be awarded. You're generating more of the currency, but what is the underlying value of the currency? What problems does it solve that cannot be trivially reproduced by forking a code base? What value does this add to the world?
Scarcity is not value.
Answering the above questions correctly will lead to understanding if an asset is an actual investment. For long-term investing, it is paramount to choose properly diversified assets that produce real value for the long-term. If you focus on buying these assets, it does not matter what the price is when you buy them. If you buy assets that hold no real long-term value producing capability, then you better time your purchases and sales well, since there are as many losers as winners in that game. I'd rather play the game with all winners than risk losing.
Enjoy this graph I generated for a 0% expected return asset with a std deviation of 15% over 100 years: