The difference between investing and speculating

in #economicslast year

I think one of the most common misconceptions about the market, and by extension, about the stock market and/or the cryptocurrency market is that the market is a zero-sum game, i.e., that your losses are other people's gains and other people's losses are your gains, that is not correct. For someone to win, someone else does not necessarily have to lose. In theory, when two parties agree on a commercial transaction, the outcome of the transaction benefits both parties. When I pay tens, hundreds or thousands of dollars for a cryptocurrency I am accepting that that currency has a similar or greater value in my eyes than that amount of money, therefore, it is preferable for me to have that cryptocurrency than to have that amount of dollars. The same is inversely true for the seller. This is a fair transaction in which we both win. The problem happens when we buy a cryptocurrency that has no real value for us, but we do it with the intention of speculating and making money. Since in such cases the cryptocurrency has no real value to us other than the price, the chances of losing with such a transaction in the event of a depreciation are multiplied.

The problem here is not really the market, but this specific type of speculation. There is a subtle difference between investing and speculating. Someone who is investing believes that the price of what they are buying is less than its value, and therefore, it is a good idea to invest there. It is less likely that someone will lose money this way. On the contrary, someone who is speculating is indifferent to the real value of what he is putting his money into, he is just betting that it will go up in price. In these cases the risk is higher, and I tend to think that no one can really live on speculation in the long term.

It is always a matter of asking oneself if what one is buying is really worth the price one is paying or more, or if on the contrary the value is in fact lower.

Trading cryptocurrencies is really like trading apples. You can trade the same apples for a long time with other people, but if you don't eat them, eventually those apples will rot, and we know that no one wants a rotten apple. There are cryptocurrencies that you can eat and others that you can't, there are some that will eventually rot. If a person is speculating, it is possible that at the end of the game they will be left with a lot of rotten apples.

But this is not financial advice, of course not, how could it be? What this is, however, is a short economic analysis of how the market works, especially the cryptocurrency market, and of a false myth that is widespread in this regard. So no, one's losses are not another's gains and vice versa.


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