“No system of government, no economic system, no currency and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.” — Ray Dalio.
Speculation: A Cycle We Keep Repeating
Speculation is nothing new. In fact, it’s as old as currency itself. Take the example of “scrip”—company-issued currency used in the 19th and early 20th centuries. Scrip was a form of credit that substituted legal tender, often in the shape of tokens, vouchers, or coupons. It was commonly used in remote company towns, like mining camps, where workers could only spend it at company-owned stores.
Large corporations, such as railroads and mining companies, operated in areas far removed from traditional banking systems. To handle these isolated economies, they created their own currency, paying workers in scrip that could only be used within the company’s closed-loop economy. While scrip served as a medium of exchange, its value was speculative—it relied entirely on the company’s survival. If the company faltered or went bankrupt, the scrip became worthless, leaving workers stranded and financially devastated. By 1964, the scrip system was phased out.
Just as scrip depended on the company’s survival, today’s speculative cryptocurrencies depend on something equally fragile: confidence. Their value often has little to do with tangible utility or cash flow and everything to do with belief in their future demand.
History Teaches Us a Valuable Lesson
As Charles MacKay wrote in Extraordinary Popular Delusions and the Madness of Crowds:
“Like individuals, nations have their whims and peculiarities. At times, they become obsessed with a single idea—running after it until something newer and more captivating catches their attention.”
This is precisely the psychological pattern we see today in the world of cryptocurrencies. As of 2023, approximately 5.2% of the global population, or 420 million people, own cryptocurrency. Yet, a staggering 79.2% of them engage in trading or holding these assets as investments—speculation at its core. Only a small percentage use them for actual transactions.
And here’s the hard truth: 17% of all Bitcoins are lost, trapped in wallets without access keys since there is no central authority to reset the key to access your Bitcoin. This is a sobering reminder of how easily speculative assets can slip into oblivion. Of course, having said said, there are third-party recovery options if the wallet is operational.
The Illusion of Stability in Speculation
Many point fingers at the current fiat system, blaming it for everything from inflation to economic instability. However, it’s important to understand that cryptocurrencies, like scrip before them, are also built on a foundation of belief. They may not be perfect, but fiat currencies have one key advantage: they are backed by the full faith of governments and supported by tangible reserves such as land, infrastructure and other national assets. In contrast, cryptocurrencies have no such foundation.
Fiat currencies facilitate transactions and provide stability, especially in times of crisis. Governments, despite their challenges, intervene when needed—such as during recessions—offering liquidity and lowering interest rates to stimulate the economy. It’s a system that works, despite its flaws.
The Dangers of Speculation: A Modern Fable
Think about the rise and fall of FTX, once a beloved crypto exchange. In 2019, FTX launched its own token, FTT, offering users perks like lower fees and a front-row seat to the booming world of non-fungible tokens (NFTs). But in 2022, FTX collapsed, revealing that its partner, Alameda Research, was dangerously reliant on FTX’s token. The ensuing rush to withdraw funds exposed an $8 billion shortfall, leading to bankruptcy.
Benjamin Franklin once said, “When the well’s dry, we know the worth of water.” It’s the same with speculative assets. When confidence disappears, so does value.
Despite these lessons, many investors continue to follow the herd, drawn in by the excitement of the moment. It’s human nature to ignore risks when everyone else seems to be winning. But history teaches us otherwise.
The Wisdom of Caution
Howard Marks, a renowned investor, explains it best:
“People often ignore the lessons of past financial crises due to a short memory when it comes to money. Easy money and low interest rates encourage risky behaviour, driven by ignorance of history, the desire for profit and fear of missing out. These factors push people toward dangerous decisions, even when the risks are clear.”
Today, many investors are suffering from optimism bias—a tendency to underestimate risks and overestimate returns. This leads them to make speculative, high-risk decisions instead of sticking to a well-thought-out strategy.
To avoid the traps of speculation, focus on assets with intrinsic value, clear cash flow, and a solid margin of safety. This is what matters in the long run.
Awet Ghirmay, Head of Investment Research
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. The Financial Conduct Authority does not regulate most crypto assets or services. Bitcoin is a crypto asset. Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you are unlikely to be protected if something goes wrong. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
