Speculation is a gamble against the market

Speculation is entering the world of seeking profits from the volatility of various assets, whether they are securities, commodities, or cryptocurrencies. Speculators are those who accept high risks to potentially achieve high returns. They do not seek long-term value but focus on short-term price movements.

Strategies of Speculators

Speculators do not sit and wait; they employ a variety of battle-tested tools to increase returns, including:

• Margin trading to amplify the size of bets
• Short selling to profit from price declines
• Derivatives such as futures contracts and options that allow controlling large assets with less capital

For example, in the commodities market, if a speculator expects gold prices to rise, they will buy futures contracts. When prices increase as anticipated, they close their positions and realize profits.

Speculation in Cryptocurrency

The cryptocurrency market is a playground for speculators, especially Bitcoin and Ethereum, which have seen significant speculative activity.

During the market surge in 2021, Bitcoin reached nearly $65,000, mainly driven by speculative trading. Bitcoin enthusiasts buy when prices are low, claiming it will be the future, then sell normally when FOMO (fear of missing out) causes a flood of new entrants.

Volatility and the Real Impact of Speculation

Speculation can shape markets in two ways:

Positive aspects:

• Increasing market liquidity, making it easier for others to buy and sell
• Helping prices find equilibrium faster when new information emerges
• Supporting technological development through large capital flows into new sectors, such as renewable energy

Negative aspects:

• Increased volatility that may scare long-term investors
• Bubbles and crashes; a classic example is the GameStop event in early 2021, when a group of new speculators drove prices high, only for many to suffer heavy losses when the bubble burst
• Systemic risks; speculative bubbles in the real estate market led to the 2008 financial crisis

What Investors Need to Know

If you want to avoid speculation or sometimes dive deep into it, you must understand the difference:

• Speculative bubbles are short-lived, driven by momentum and excessive excitement
• Real growth opportunities are rooted in value, good businesses, and long-term trends

Knowing this distinction can be the difference between making profits and losing significant money.

Speculation Across All Markets

Whether in stock markets, commodities, or cryptocurrency exchanges, speculation is part of the operation. Traders enter and exit positions to capitalize on price changes. Sometimes they win; sometimes they lose.

Summary

Speculation is the breath of the financial markets. It is believed that great profits await speculators. It provides liquidity and price discovery, but if overdone, it can cause confusion and collapse.

For the average investor, observe, feel, and plan. Understanding speculation is about protecting yourself from the market’s excessive particularities.