During a lunch meeting, I mentioned my investment in the Ethereum crypto currency was growing in value. My business partner shrugged it off and avowed, “Investing in crypto currency is just gambling!” A sudden rush of guilt over came me and I remorsefully repented.
Well, the last part didn't actually happen, but the comment made me think.
Gambling is defined as risking money on an event’s uncertain outcome with the intent of winning money. By the broad definition, investing in the stock market, real estate, baseball cards, coins, and Norman Rockwell plate collections would all be considered gambling. The thin line between pure gambling and investing is the value creation element.
Gambling is a zero-sum game when there's a clear winner and loser in all cases. No value is created in gambling.
When investing, value is created. An individual purchasing stock allows a corporation to use the invested funds to build factories. The factories enable a corporation to grow earnings and increase the value of the stock. Both the individual and the corporation wins. Value is created. Therefore, investing is not really gambling in the true sense of gambling.
Is investing in cryptocurrencies such as Bitcoin, Ethereum, and Litecoin a zero-sum game? Are there winners on both sides of cryptocurrency? Is value created from cryptocurrency investments?
We can hypothesize the intentions behind the founders of cryptocurrencies. Were they merely intending to propagate illegal trade? Were they intending to end the stranglehold the banking system has on commerce? Were they frustrated government controlling our economy using politically motivated fiscal policies? Were they seeking to eliminate barriers in international trade?
Irrespective of the intentions, investors are speculating value into cryptocurrencies. It's no different than investing in unprofitable platforms like Facebook, Uber, and LinkedIn during their IPOs. Investors speculated future value and eventually profitability resulted. This was an investment because the speculation was a win for all involved.
Warren Buffett recently said, "In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending." 37% of his $178 billion Berkshire Hathaway portfolio is invested in bank stocks. Does he see cryptocurrency as a potential disruption to his bank portfolio?
Nonetheless, investors in Bitcoin and other cryptocurrencies are speculating future value largely due to the potential disruption of banking systems. There is value in disruption. Anyone claiming no value in disruption needs to give away all their belongings and go live in the woods for a few weeks. Disruption creates value by allowing people to do things in a more convenient way. Will Bitcoin allow us to more conveniently purchase our wines directly from the French vineyard? Will Ethereum replace the poorly designed and managed euro?
This speculation is no different than an oil company speculating a drilling investment off the coast of West Africa or a pharmaceutical company testing a new cure for cancer. If the oil company is correct, they will supply millions of people with much needed energy to heat their homes. If the pharmaceutical company is correct, millions of lives will be saved. If cryptocurrency investors are correct, millions of people may be given an alternative to our current inefficient government run banks.
I can now sleep at night and avoid going to confessional with my small investment in Ethereum. Same with my investments in Amgen and Chevron.
Trenegy is a non-traditional consulting firm dedicated to helping companies clarify the latest business trends and hot topics. Find out more: info@trenegy.com.
