In defense of crypto speculation

I want to clarify something: Speculation is not a dirty word.

Along with many others, I have recently been urging the crypto community to emphasize real-world use cases. The way out of crypto winter, we’ve argued, is to discard the “numbers go up” mindset that underpinned so much market activity before the winter, and instead focus on solutions that provide real benefits to humanity – like renewable energy projects. The argument is that if the supply to decentralized finance (DeFi) is to be more sustainable, the returns that attract investors must be based on services that provide 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 can meet the demands of the credit union’s younger members that it provide crypto trading opportunities “without just encouraging pure speculation.”

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On the surface, that sounded like a concern directly aligned with my “real-world use case” point. If we could just stop the speculators, there might be a better story of growth and purpose for this industry, rather than get-rich-quick values ​​that tend to be associated with “crypto bros.”

But as important as building real value is, the question contained a misunderstanding about the value and purpose of speculation. It is essential for a market economy. It is fundamental to how we as a society decide which ideas, projects or businesses win or lose. We need it.

When it comes to emerging technologies that on the one hand have the potential for mass disruption, but on the other face a particularly entrenched and politically entrenched incumbent system, the speculative process is both lengthy and highly unstable. We saw this in the early days of the internet, when the dot-com boom pushed the prices of online companies 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 barriers to achieving that disruption are so high that the cycles of hope and disappointment are more extreme. These factors also prolong the period of speculation because they extend the process a technology goes through before it reaches mass adoption and full potential.

Think about what bitcoin (BTC) wants to be. It’s not a new type of car, like Tesla, or a better payment app, like Venmo. It is designed to overhaul a centuries-old monetary system. It contains unimaginable prospects for change—and profit—as well as daunting challenges in resisting that change. It is a recipe for speculation and for price volatility.

When economists dismiss bitcoin’s viability as a store of value to rival gold (due to its volatility), they are holding it to a ridiculously narrow standard.

How long do you think it took gold to become established in human consciousness as the embodiment of permanent, lasting value? (Note: There is nothing innate about gold’s value, although the metal has qualities that support its convenience as a store of value; this value was socially constructed over time—for a very long time.) Bitcoin has the capacity to be a superior, digitally native version of the same depoliticized form of money, but to expect it to immediately embody that status in everyone’s mind is to doom it to failure and to deny it the testing process it must go through to achieve it.

The jury is still out on which crypto projects survive to prove their value proposition—bitcoins as “digital gold,” for example, the Ethereum blockchain as “world computer”—and their members deserve a decent time to judge. In the meantime, investors will inevitably speculate whether each achieves its relevant status.

This means that prices in this initial, relatively illiquid period will continue to rise and fall with much greater variation than established asset classes.

We should change the perspective on speculation. Regulators and self-regulators concerned with taming crypto’s “Wild West” nature do not need to kill speculation per se, but to stop charlatans from exploiting the speculative environment by dishing out falsehoods and scams to investors.

Don’t end the speculation. Fuck the scammers.