This has been an ongoing debate ever since Bitcoin first crossed $1,000. Some people believe that cryptocurrency is a legitimate asset that belongs in any well-diversified portfolio. Others see it as a highly speculative vehicle with little application in the investment world.
The answer generally lies in between these two viewpoints. It’s worth considering the wide range of people who use crypto today. Some are playing blackjack with crypto, which allows for quicker transactions and greater reliability.
Others are dollar-cost averaging into Bitcoin monthly to hedge against inflation, similar to how they’d allocate money to an index fund. While the assets in both of these scenarios are the same, the outcomes between the two are significantly different.
When investing starts looking like gambling
The way that some people define crypto investment makes it more akin to gambling. People will often get caught up in the hype and buy a token just because they saw it trending on social media. They double down after a drop to “average in” and sell out of panic when the first green candle appears. These types of behaviors are a type of emotional decision-making, something which drives every casino in the world.
Research in behavioral economics consistently shows that engaging in speculative asset markets engages the same neurological rewards as gambling. The dopamine hit from a price going up and the compulsive checking of prices, aren’t unique to crypto. These are features that casinos have incorporated into their gaming experience for centuries. They’re now part of an asset that also has a growing utility and backing from major institutions.
The case for crypto as a legitimate asset
When you forget about the hype cycles and meme coins, there is a strong investment case for cryptocurrency. Bitcoin stands out as it has a fixed supply of 21 million coins, so it can’t be inflated away by central banks. Many institutional investors, publicly listed companies, and sovereign wealth funds now have big holdings as a treasury asset. Spot Bitcoin ETFs, which are SEC approved, have attracted tens of billions worth of inflows. These are strong indicators of an emerging asset class, despite the ongoing volatile price discovery.
Ethereum is an important cryptocurrency that has an important function in the financial ecosystem. It enables decentralized lending, tokenized real world assets, and stablecoins. There’s real world utility that means there’s ongoing demand for Ethereum, which is vital for any durable investment type.
A small allocation to crypto can give asymmetric upside to investors and a lower correlation to traditional equities during certain market cycles. It’s also a useful hedge against currency debasement. Managed responsibly, cryptocurrency is smart diversification and not gambling.
Strategy separates the two
The difference between gambling and investing is down to the approach and not the asset. The principles depend on whether you’re managing a portfolio or sitting at a blackjack table. A skilled blackjack player understands expected value and manages their bankroll.
They avoid chasing losses and know that short-term variance is going to be unavoidable. They’re making decisions that will be correct over a long series of outcomes. This is similar to the approach that successful investors take.
The crypto investors who have done well usually share many of the same traits. They’ll have a defined thesis as to why a particular asset holds long-term value. They’ll also be careful to have a position size that is relative to what they can afford to lose. They set their rules for selling in advance, such as a price target or time horizon, to ensure that they don’t let emotions impact their decision-making.
The verdict
Crypto is neither inherently an investment nor a gamble. It’s a type of technology and a financial instrument that will function in a way that depends on how you use it. People who treat it as a form of entertainment do so in full knowledge of the stakes.
Those people who are most at risk are those who believe that they’re investing when they’re actually behaving like gamblers. Having a plan, discipline, and honest conviction is vital for anyone looking to invest smartly in crypto.