As we march through 2024, there is a renewed sense of optimism in the cryptocurrency sector. There are several reasons for this, and not all of them are linked to the rising total market cap of cryptocurrencies. That said, money talks, and around $0.5 trillion was invested in cryptocurrency from October 2023 to January 2024, representing about a 50% increase.
That said, we arguably used the incorrect term when we said “invested” in cryptocurrency. Despite the rhetoric from web3 proponents and those who believe in the future of crypto, any purchase of a cryptocurrency position should be viewed as speculation. While investing and speculating sometimes overlap, there are clear differences between the two concepts.
What is speculation?
Speculation is any financial transaction where the outcome could either be a significant profit or substantial loss. Thus, even the most wide-eyed crypto enthusiast would tell you that putting money into tokens is speculation. You might argue there are some exceptions. For example, if you buy stablecoins and stake them for interest. This might be construed as an investment. But broadly speaking, all crypto purchases are a form of speculation.
What is an investment?
Investment is a financial transaction where the chances of substantial losses are relatively low. Investing in a stock market ETF (over time), indices, buying government bonds, or some ‘dependable’ stocks might constitute investment. There is always a risk of loss in any investment, so just because there is a difference in the definition of financial speculation and investment does not mean the latter is guaranteed to be successful.
Some cryptocurrencies may evolve into investments
Now, returning to cryptocurrency, we have probably established that it is not controversial to call it speculation or speculative investment. To be clear, this is not meant to denigrate cryptocurrency – far from it. In fact, we intend to do the opposite: talk about cryptocurrencies’ journey to becoming an investment rather than a merely speculative asset. Of course, we do not mean all cryptocurrencies. If you are buying some meme coins and pinning your future on them because it has a funny picture of a frog, then you’ll remain a speculative investor and, on the balance of probabilities, a poor one.
However, there are arguments that some crypto tokens and their underlying projects may someday become more like traditional investments. To make our case, we need to use some examples. Consider, for a start, Apple stocks. Most people view buying Apple stocks as an investment. Why? Because the stocks are representative of underlying tranches of products and services – all the iPhones, iPads, and Macs Apple sells, as well as all the profits earned from stuff like App Store commissions.
Therefore, we can make a distinguishment between buying Apple stocks and buying a cryptocurrency with no underlying product. Yes, most serious cryptocurrency projects will claim some underlying use case for the token, ranging from governance to staking value to gas fees, but much of this can be difficult to explain to a non-web3 native. Moreover, the volatility of crypto tokens keeps them firmly entrenched in the speculation category.
Some projects are building products and services
But what if there were underlying products that held up the token in much the same way as Apple’s products and services do? To give you an example, let’s look at Solana. We can point to Solana products, such as its flagship web3 phone, the Solana Saga Phone. The Solana network also provides services. Consider what is happening in Mexico, where the telecommunications giant Telefónica is rolling out mobile 5G hotspots using the Helium network (built on the Solana blockchain).
Please be aware that we are not promoting Solana as an investment. Indeed, we should be clear that the project has its issues, not least a propensity for the network to have outages. But it is clear that Solana is building products and services like a “real” company, and that holds up the value of the cryptocurrency. It’s not quite Apple Inc. yet, nor will it likely ever be, but in the years to come, it may have so many of these products and services that the Solana token becomes viewed as more of an investment than speculation.
Of course, we can get bogged down in definitions here. Bitcoin proponents may argue that, as the asset matures, it becomes less speculative, particularly when we factor in a decreasing supply and the entrance of Wall Street participants into exchange-traded funds, which may represent pension investments, etc.
However, we should keep returning to the same fundamental argument. Cryptocurrencies need viable use cases for their underlying projects should they ever make the transition from speculative assets to investments. This could take many years, perhaps decades. But whether it is Solana building a smartphone to rival the iPhone one day or Chainlink becoming the universal gas token for the world’s banking network, there are possibilities that, for some cryptocurrencies, this transition can happen.
