In defense of crypto speculation
I want to clarify something: speculation is not a dirty word.
Along with many others, I recently reached out to the crypto community to focus on real-world use cases. The way out of the crypto winter, we argued, is to discard the “number surge” mindset that underpinned so much pre-winter market activity and instead focus on solutions that bring real benefits to humanity, such as renewable energy projects. The argument is that if inflows into decentralized finance (DeFi) are to be more sustainable, the returns that attract investors must be based on services that offer more tangible economic value.
But after speaking to a gathering of credit union executives hosted by financial services provider Allied Solutions this week, I feel compelled to qualify that position. An audience member asked me how he could meet the demands of young members of his credit union to provide crypto trading opportunities “without just encouraging pure speculation.”
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At first glance, this seemed like a concern directly aligned with my “real world use case” point. If we could just shut down the speculators, there might be a better story of growth and purpose for this industry, rather than the get-rich-quick stocks that tend to be associated with “crypto bros.”
But as important as it is to create real value, the question contained a misconception about the value and purpose of speculation. It is vital for a market economy. It is fundamental in how we as a society determine which ideas, projects or businesses win or lose. We need it.
When it comes to nascent technologies that on the one hand have the potential for massive disruption but on the other come up against a particularly ingrained and politically entrenched incumbent system, the speculative process is both lengthy and very volatile. We saw this in the early days of the Internet, as the dot-com boom pushed the prices of web-based businesses to unsustainable levels, but also laid the foundation for the boom of the Web2 era.
In crypto, the speculative furor is even more intense because of the degree of potential disruption and because the hurdles to achieving that disruption are so high that cycles of hope and disappointment are more extreme. These factors also prolong the period of speculation because they prolong the process that a technology goes through before reaching mass adoption and reaching its full potential.
Consider what bitcoin (BTC) aspires to be. It’s not a new kind of car, like the Tesla, or a better payment app, like Venmo. It is designed to overhaul a centuries-old monetary system. It contains unfathomable prospects for change – and profit – as well as daunting challenges in resisting that change. This is a recipe for speculation and price volatility.
When economists reject the viability of bitcoin as a store of value to compete with gold (due to its volatility), they hold it to a ridiculously narrow standard.
How long do you think it took for gold to establish itself in human consciousness as the embodiment of permanent and enduring value? (Note: There is nothing innate about the value of gold, although the metal has qualities that support its convenience as a store of value; this value has been socially constructed over time – very long.) Bitcoin has the ability to be a superior, digital native version of the same depoliticized form of currency, but to expect it to immediately embody that status in everyone’s mind is to doom it to failure and denying her the ordeal process she must go through to get there.
Juries still don’t know which crypto projects survive to prove their value propositions — bitcoin as “digital gold,” for example, the Ethereum blockchain as a “world computer” — and their members deserve a time. decent to decide. In the meantime, investors will inevitably speculate on whether each achieves its relevant status.
This means that, in this nascent and relatively illiquid period, prices will continue to rise and fall with much greater variance than established asset classes.
We should change our view on speculation. Regulators and self-regulators who wish to tame the “Wild West” nature of crypto need not kill speculation per se, but prevent charlatans from exploiting this speculative environment by peddling lies and fraud to investors.
Don’t cancel speculation. Stop the scammers.