An adult entertainment start-up by the fitting name of Klyemax Studios recently raised some funds through the Bitcointalk forum. 250,000 shares were offered to the public at a price of 0.0001 BTC each. All shares were sold and the studio managed to raise about $16,000 in current value. Just last week, the CEO confessed to having gambled away all the money. In his public apology, he states that he ended up “investing into Just-Dice.” Just Dice is a dice-based Bitcoin casino. The statement shows that the meanings of the words gambling and investing have faded so much, that they are used interchangeable. In reality, a distinction should be made and it can be a useful exercise to determine whether your own activity relates more to gambling or investing.
First consider the actual definition of both words:
- Gambling: to stake or risk money, or anything of value, on the outcome of something involving chance
- Investing: to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.
Even though this may sound different, they do have a lot in common. After all, gambling offers potential profitable returns and investing involves chance to a certain degree. The dictionary alone will thus not provide a clear distinction. Some define an investment as: “simply a gamble in which you’ve managed to tilt the odds in your favor.” But this would be overly simplistic. In most Out of the Money options odds are not in your favor, and you can even tilt some of the odds at gambling in your favor.
Properties of gambling
Looking at the properties of gambling and investing, the difference becomes clearer. Gambling can be addictive and destructive, which is not the case for investing. If you claim to be a buy-and-hold investor but find yourself checking your portfolio daily or even hourly, and changing your position quite frequently, then you are displaying some typical compulsive gambling behavior. Commissions and bid-ask spreads as a result of active trading will hollow out the investment, and this behavior will be very exhausting emotionally.
Of course, there should still be a distinction between trading and trading in a gambling style. Not every trader is a gambler, even though their actions will follow the previous pattern. Real trading happens in a methodological, systematic and tested way, while trading in a gambling style means trading to win for excitement or social proofing reasons. The latter indicates gambling and is unlikely to succeed over the course of many trades. If you are trading to win, it can actually drive you away from making money. Trading in a methodological and systematic way allows one to take losses when they should, otherwise the trade will turn in a gamble.
Gambling versus speculating
Even more difficult to perceive is the difference between gambling in speculating. The world’s most famous investor Warren Buffet once explained the difference as follows: “if there’s a societal value to a financial activity — for instance allowing a farmer to lock in futures prices — those that play in that space should qualify as speculators rather than out-and-out gamblers.” Overall, the difference is very vague, and one could wonder if it really matters.
In the end, gambling tendencies are sometimes hard to perceive. It can take several forms, and some might end up gambling even though this was not intended. Many people do not even realize they are in fact gambling. The previous offers several indicators that could point to gambling rather than investing or trading. The former should be avoided as it is most likely to result in a loss in the long run. Investing is, in fact, far from gambling at the casino. Investing in cryptocurrencies is thus not the same as gambling on them, no matter how risky they may be.