Too many people without financial literacy, the stock market, and the crypto space extension are a mysterious black box.

The number goes up.

🤑

The number goes down.

🤯

Yet many people using investing apps are buying a crypto dream of the day they get a 1000x return, allowing them to buy a raccoon rehabilitation farm or whatever else they desire. But during tumultuous periods of financial and societal instability, many people find themselves unemployed or in difficult straits. According to a Charles Schwab poll, 15 percent of retail investors started playing the market around the start of the pandemic.

Here, having a phone handy and extra time on one’s hands may quickly turn disastrous, much like pestering a Grizzly bear and her cubs. This is what scientists call a hell of a gamble.

Suffice it to say; it is easy to fall down rabbit holes on Twitter, Reddit or Discord and get sucked into a trendy new asset. We can buy with one small click and then track a stock or crypto 24/7, obsessively refreshing. Worse yet, there are screenshots of so-called “Loss Porn”, people displaying their five, six and seven-digit losses on the market.

While many people lost a lot of money on the market, a select few investors made a killing. They say that the time to buy is when there’s blood on the streets, and those who gambled on Bitcoin while it was 5k at the start of the pandemic won out.

At what point do these investing practices become gambling, and is there a delineation between these two terms? More importantly, is it possible to make a sure bet when it comes to cryptocurrency and investing?

Briefly, let’s define these two terms that make the crux of this article:

  • Gambling: Formally, gambling involves making bets on games of chance, and more colloquially, it can be defined as taking risky actions.
  • Investing: Reallocating resources into a new asset in the hopes of making a profit. Low-risk investments will likely yield low returns, while high-risk investments may yield high returns.

Crypto versus the Stock Market

Is Traditional Investing Safer than Crypto?

While many people have made gains on the stock market and in crypto, it is much easier to do when you already start with substantial wealth to diversify and invest. It is easy to make a steady profit with wealth by investing the majority of your assets into low-risk stocks. Furthermore, crypto is still relatively nascent and involves a substantial amount of risk, at least when compared to the stock market. Of course, undertaking any investments carries a moderate level of risk.

Best Strategy for Risk-Averse Investment

Fundamentally speaking, the safest investments you can make are low-risk, well-performing index funds. These provide the most bang for your buck, and while they might not provide the same returns as BTC, they have a longer track record of steady returns. An index fund is a portfolio of many stocks that follows their value; given that the market tends to appreciate over time – it is a safe bet that can yield up to 8 to 12 percent returns.

Can You Avoid Substantial Risk in Crypto?

It doesn’t matter how bullish you are on crypto; the simple answer is a higher risk inherent in these investments. There are currently only two “bluechip” investments in crypto, Bitcoin and Ethereum, which historically yield far greater returns than the stock market. But past performance is not a predictor of future gains. Cryptocurrency is brand new to the finance and tech world and faces many hurdles and competition from other cryptocurrencies.

While the chances of Bitcoin and Ethereum completely collapsing aren’t likely at this point, it is still a possibility. More likely, these profits can be lost on hardware wallets or stolen by North Korean hackers if you’re unlucky. Appropriately, since this investment has a higher risk, the rewards can also be higher. The best way to invest with these assets is to store them in a crypto bank like BlockFi or Celsius to earn 4 to 6 percent interest.

Even without accounting for interest, the value of these assets has steadily risen. Let’s look at the changes in the price of these assets over the last five years (per Coin Market Cap).

Start of Year BTC ($USD) ETH ($USD)
2015 $320.43 N/A
2016 $430.72 $0.9337
2017 $963.66 $7.98
2018 $14,112.20 $755.76
2019 $3746.71 $133.42
2020 $7194.89 $129.63
2021 $28,994.01 $737.71

Meme Stocks and Coins

Meme stocks and meme coins like DOGE and SHIB can be disastrous. The promise of a short-squeeze to screw-over large financial hedge-funds is a compelling narrative, but there is no guarantee that such an unlikely economic event will occur. While DOGE or SHIB has given a few people more than 1000X gains, it has undoubtedly ruined many more people financially. It’s a slot machine with extra memes.

Investing more into these assets than you are willing to lose is dangerous. When you’re following the narratives on social media, getting caught up in confirmation bias is easy. You’ll only see posts that confirm your point of view, that you’re right in making this investment. These forums and social media posts can encourage gambling for many individuals, especially during the pandemic.

Research for Riskier Investments?

Note that low-risk long-term investments in stable assets are likely the safest bets. Time in the market is far more valuable than timing the market.

Whereas if you start day-trading, you’ll step into the enticing world of gambling. Only illicit inside traders can reliably make these bets, as they know the odds of potential outcomes.

There is plenty of fraud and speculation for crypto projects, especially during initial coin offerings and NFTs.

Look to answer these questions for nascent projects:

  1. Is there a good use case? Suffice it to say, not everything benefits from being on a blockchain.
  2. Is there a technical whitepaper? Good whitepapers describe the technology being developed for the blockchain and its potential value as a future product. If the whitepaper isn’t very technical and simply uses buzzwords, it is probably a scam or a project that won’t succeed.
  3. Is the team public and reputable? A good project will have a developmental team that has worked in similar technology areas, not just marketers and social media gurus. They need to have a track record for developing and building valuable products. If they’ve worked on crypto projects in the past, did those succeed?
  4. How much crypto is allocated to the team? If a large number of tokens are distributed to the team, is this made clear why in the whitepaper or elsewhere on the roadmap of the website?
  5. Are they active in Twitter/Discord etc.? A solid project has a team of people who answer social media questions and do so without calling critics haters (yes, some projects have done that).
  6. Open Source? A good project will also use GitHub or a similar code repository that makes sure anyone can audit the blockchain and ensure that it is secure.
  7. Are Celebrity Influencers on Board? When I see a new project with tons of paid celebrities or crypto influencers, I am suspicious. Good projects generate traffic and interest organically, rather than paying someone famous.

Also, the moment I see people who have been involved in scams and grifts, like Jordan Belfort or Ja Rule, promote a project – I begin to rethink my decisions.

The Gamification of Bad Decisions

One of the riskiest ways to blur the line between investing and gambling is through day-trading. In the case of day-trading, you rely on the chaotic and volatile nature of day-to-day fluctuations in an asset (whether it’s crypto like BTC or a stock like TSLA).

Here, investors rely on the volatility of different assets in the short term; winning gives you that immediate rush of adrenaline and a feeling of invulnerability. But more likely than not, you might have little control over the outcome, and it is easy to get addicted. You might start losing money and decide to keep going until you win it back, going further and further into debt. Sleek and easy-to-use interfaces are there to draw you in and keep you taking risks.

Per a recent Bloomberg Finance article, apps like Robinhood may even engage in criminal activity by using these gamified tactics:

“Massachusetts securities regulators in December filed a complaint against Robinhood, calling out its “gamification” tactics, and more recently sought to revoke the brokerage’s license in the state for continuing “a pattern of aggressively inducing and enticing trading among its customers.”

Takeaways

There is a certain degree of gambling and uncertainty in many, if not all, types of investing.

The safest ways to invest in traditional stock markets will involve index funds, while with crypto, it will involve earning interest on BTC or ETH through a crypto bank.

It’s wise to build a solid diversified portfolio of index funds and bluechip crypto before adding in riskier investments.

Don’t put in any money you aren’t willing to lose or are likely to need back within a few months.

While there are potential rewards for higher-risk investments, they often involve more of a gamble. Remember, don’t fall down the rabbit hole of confirmation bias and FOMO.

Don’t go bankrupt trying to make 10000X gains on a meme stock that could collapse at any moment.

Limit the time you spend on your phone, avoid obsessively checking your portfolio and don’t let emotional decisions suck you into selling low or buying high. If you want to take the gambling completely out of investments.

Many apps and exchanges have gamified trading and tracking the daily fluctuations in the stock market. In some cases, this has led to complaints, alleging that these companies are encouraging gambling under the guise of investments.

Despite the legal implications, the best day-traders are often the ones with some insider information.

You can check out this confidential hotline for help with gambling in the US. For help in Canada, click here.