What is speculation in the cryptocurrency market and how to take advantage of it and win?

Speculation can be a lucrative financial process for some, while most investors see speculation as a kind of irresponsible behavior, something very similar to gambling. However, the main difference between speculation and gambling is the fact that the former is done with the investor's money and not with personal funds.

What is speculation?

In a classic financial context, speculation consists of trading a financial instrument that involves high risk, in the expectation of high or significant returns. This method aims to take full advantage of fluctuations within a financial market.

In short, the investor takes the risk and expects the profits made to outweigh the potential loss. At the beginning of this article, we pointed out that some investors consider speculation a kind of game. This is not entirely true, as the game often also involves an element of skill. Also, gambling is not considered an investment, as chance plays a very important role.

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In speculation, even if the stakes are high, with enough effort, work, and inspiration, an investment can become a success. To be more precise, when it comes to speculation, all investors play down the chance aspect as much as possible.

Effects on price volatility / stability

As much as a bet looks like speculation at first, it has the power to influence price stability. For example, speculation-based valuation can change dramatically as assumptions about how much a project will be worth in the future. Speculation can also create demand for a product at a huge potential price range.

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Is cryptocurrency speculative?

Before answering that question, it is important to note that for most of their life and history, cryptocurrencies were seen as being primarily speculative, hence their extreme price volatility.

One could argue that cryptocurrency is speculative, but this is not always the case. In short, very few cryptocurrencies have entered a phase of practical use. Generally, crypto projects that are under active development and refinement are considered speculative projects. However, there are some speculative stages that a crypto project needs to go through in order to shed its “speculative label”.

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The speculative stages

The first thing we must understand is the fact that speculative value can take many forms. In short, value is not binary, never fully speculative, nor fully practical. As we know, crypto and blockchain projects start with creating a whitepaper. At this stage, a project is mostly speculative, as investors are speculating whether the technology described in the article will ever exist.

After this stage, investors still speculate on the technology that proves its value, its usefulness, keeping to the use cases for which it was created. At this stage, practical use in commerce comes into play. If a project can be commercially useful, it is one step closer to practical use. Even when practical use is achieved, speculation does not stop. The next phase of speculation involves verifying whether or not the project's technology will be dominant in its specific field.

Speculation involves one more step and is related to broad commercial use outside the narrow field of specialty of a product. Unfortunately, most cryptography projects usually fall between the first three phases and never enter the practical use phase.

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For example, Bitcoin has managed to reach the third phase, from its consistent use as a payment system, to exactly what it was designed to do. Bitcoin’s never-ending scalability issues have prevented the project from reaching its true practical use as it seeks to scale improvements through various off-chain solutions such as the Lightning Network.

Ethereum is pretty much in the same situation where it is still proving its viability and struggling to achieve practical use, that of a complex and practical smart contract space. However, Ethereum managed to reach the fifth step by proving all these years that it is the ideal environment for ICOs.

Currently, it seems that most crypto projects are locked in a race to become the first commercially viable cryptocurrency. Most of these projects aim to see their value derived from commercial rather than speculative use. It is also important to note that investors play a very important role in the cryptosphere. At the heart of the crypto market are investors hoping to turn relatively small investments into piles of digital cash. These investors are also known as speculators.

While some invest solely based on their instincts, others have above-average technical knowledge of the crypto market. All investors are speculators in one way or another. At the end of the day, the crypto market is probably the best high-risk, high-gain investment area.

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Final Words

Cryptocurrency may have started out in life as something that was not taken seriously by many, but nowadays it has made its way to some of the top financial institutions in the world. Speculators play a very important role in the crypto sphere as they absorb the risk usually associated with investing in crypto and eventually help make the market more accessible to casual investors.