In the first half of 2020, there was a surge in new trading accounts. The reason given for this was that there was no sports betting, no Vegas and no day at the track. There was no dopamine fueled highs and lows for gamblers.
So the story goes: that the gamblers took their money and headed to discount trading shops and opened accounts in the millions. Because of course, to the mainstream press, trading is basically gambling.
Traders in speculative stocks are frequently referred to as gamblers. The stocks they trade have no earnings, may have no reserves and be built around a story. And so it’s no surprise that the same narrative is often applied to Bitcoin and crypto.
So if you are trading crypto, are you a trader or, as the press would have the public believe, a gambler?
Maybe you are an intelligent speculator instead.
Let me explain.
People hate gamblers and love gambling
Gambling is mostly considered in derogatory terms, but at the same time, gamblers elicit powerful contradictory feelings of admiration, envy, disgust and sympathy. Which on the surface sounds a lot like the way some people talk about crypto and day trading.
People love to watch gambling on TV, play virtual poker and buy lottery tickets. Many use gambling terminology to make something sound sexier than it otherwise might be, or to put down what someone is doing.
Traders are seldom said to be speculating on an outcome, the press usually says they are betting. For the people they dislike, they try to assassinate their reputation by characterizing them as degenerate gamblers.
Because, of course, everyone knows that intelligent people don’t “gamble,” right?
Gambling speeds up time and emotional pressure
Gambling is, in many ways, a form of entertainment, a source of addiction, and a great lesson in decision-making. Gambling is the exploration of risks with little or no information. It is also characterized by significant time restraints. Decisions are forced to be more impulsive, although they need not be.
Emotion is deliberately amped up through interaction and direct competition. And part of gambling is about expressing ego leading to frequent stories of financial ruin.
The late Richard Bernstein focused on this element in his outstanding book, Against the Gods, The Remarkable Story of Risk, when he wrote:
“Time is the dominating factor in gambling. Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. () But what do we do after the croupier at the roulette table cries, “No more bets!” or after a poker bet is doubled? There is no going back.”
Part of this is an environment that fosters doing the wrong thing. As Annie Duke points out in her book, Thinking in Bets:
“My number one tip is always to play tight. From my experience, most new players play about 80% of the hands they are dealt in Texas Hold’em. In fact, the reverse should be the case: they should only play about 20% of them.”
Too many traders, like new poker players, are also playing the wrong part of Pareto’s number.
The gambling crypto trader
So far, quite a bit about gambling sounds like trading, and there’s a good reason for that. Many traders, whether in Bitcoin, crypto generally or in other assets like stocks, at times tend to behave like gamblers.
When a trader takes a flyer on some token based on some tip he heard on Telegram, Reddit, or some other forum, he is gambling.
When a trader takes a punt on a token from a pretend prospectus with no product, no prospects, or maybe a technically savvy team, he is gambling.
When a crypto trader uses his entire roll and adds leverage on one trade believing he is about to score, he’s gambling.
When you trade with FOMO, you are gambling.
Trading as an activity can involve aspects of gambling, but these should not include the negative aspects. These are the ones involving time constraints, amped up emotional competition, betting it all on one idea or using tips to make trades.
Traders in crypto should be using the most important elements of gambling and trading to become sophisticated speculators.
What is a speculator?
Speculators are individuals that utilize information, thinking and a process to assume and transfer risk. Unlike gamblers, they aren’t operating in an artificially amped up emotional playground or looking for entertainment. They aren’t betting or putting it all their cash down on one hand or roll.
Speculators don’t rely on tippers to make trades, nor do they succumb to the competitive pressure of the crowd to make their decisions.
A speculator is operating in an environment with imperfect information. They can gather and process large amounts of conflicting information and develop a plan of action.
That plan has expectations for a variety of outcomes, and a response to each. There is never a risk of losing your entire stash on one trade or idea.
Speculators provide valuable liquidity in the markets in which they operate. In futures, speculators provide liquidity to hedgers and producers who need to transfer risk and lock in prices. Market makers in options provide liquidity by selling premium to buyers. Stock traders provide liquidity to various orders that enter the market, creating a viable secondary market that aids in capital development.
Crypto traders in Bitcoin, Ether, and numerous other projects are providing liquidity, testing the protocols, and helping develop the space. What crypto traders are doing sometimes looks like gambling but at a high level it’s speculating.
If you look at venture capital investing, that looks a lot like speculating too.
Venture Capital as speculation
If you consider how VCs operate, they have elements of trading, gambling and investing.
They make investments decisions based on imperfect information. They may know the market, have experience with entrepreneurs, investing and building companies, but they cannot know the outcome in advance.
In fact, they readily admit that a significant portion of their portfolio will either be a bust or flatline. They rely on a small group of investments to provide outsized returns to offset these losers and breakeven investments. However, they don’t know which or how many of their choices will be the big winners in advance. Because every company they invest in has the potential to go to zero.
So in some respects, investments in startups and scaleups are gambles. Even with perfect inside information about these companies as they develop, they have little visibility on which will succeed or fail.
In trading terms, VCs take positions in prospective outcomes in anticipation of a catalyst. In this respect, although they are investments, they are also like trades. A catalyst might be a takeover, IPO or some other kind of liquidity event.
In essence, VCs, using thinking, deep market knowledge and experience combine elements of trading, gambling and investing. It’s called investing, but this approach could be called sophisticated speculation as well.
Be a crypto speculator
Many big companies started off as speculative entities. Many were startups. Many were, in some ways, pure gambles by the founder on an uncertain future success.
When you trade Bitcoin using your head, some trading rules and your process and managing your risk, you are speculating. On the other hand, when you trade to make back losses in Bitcoin, rely on tips or succumb to pressures from the news and forums, you are gambling.
Gambling is for entertainment. Trading is assuming and laying off risk for profit in a continuous, dynamic marketplace. Speculation is combining the best elements of trading with high-level decision making in from professional gambling with a bit of investing discipline.
So as you help develop the financial market of the future by trading Bitcoin and crypto, avoid outright gambling and be a crypto speculator instead.
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