Many individuals focus on the everyday fluctuations of their investment portfolios, sometimes to such an extent that daily price quotes, rather than the long-term value of their investments, drive their sense of success or failure. It is this short-term emphasis which gives rise to the distinction between speculating versus investing. At first glance the difference between these two concepts can be a fine line. Both speculators and investors attempt to experience rewards by the upward movement of an asset (unless they are “shorting”); otherwise, they would not purchase the asset.
An excellent recent example of speculating is the bitcoin phenomenon. Bitcoin has been the best performing asset of the financial markets in 2017. Over the past weeks and months, speculators have flocked to bitcoin, a digital currency whose value has soared by about 2,000% (as of this writing) in the past year alone. This “speculation” example is not a critique of bitcoin as indeed the technology underlying it could fundamentally change the way money is used as a medium of exchange. Our purpose is to illustrate the distinction between valuing an asset based on short-term price momentum, versus pricing it based on its underlying sustainable economic value.
Time is one of the key elements, which favors the investor over the speculator.
Bitcoin was released in 2009 by an anonymous creator known as Satoshi Nakamoto. The software is open-sourced, meaning anyone could copy it and produce a refined version with any changes they want. It’s a digital form of money, except there is no government or central bank printing it or standing behind it. In other words, bitcoin has no identifiable intrinsic value. Quite literally, it is software. It’s a program that is run across an interlinked network of computers, which facilitates transactions between parties. At the heart of the software is an open ledger – called a blockchain – that is visible to the public. Every bitcoin transaction is recorded in this distributed ledger.