Anyone who has been following cryptocurrency for the last years cannot deny that those who describe “investing” in this space usually mean “gambling”. This confusion of investing with gambling is partly due to the economic situation as a whole, which has forced the masses to look for a substitute for traditional investment in more speculative areas. The situation is aggravated by new technologies and trends, including mobile phones and gamification, the purpose of which is to maximize the absorption of users' attention. In addition, these “investments” are largely driven by marketing and are promoted through social networks, sponsors, and celebrity support.
For the Western world, there are two important factors here, both of which are rooted in the financial crisis. The first is associated with low real wage growth in most developed countries, and the second is the result of quantitative easing and a ten-year boom of assets, from which the richest benefited, while ordinary people were left out. I believe that both factors can be associated with the desire for a big win, like in a lottery, instead of a slow and consistent income coming in over a long time.
Unequal recovery
The first section is a kind of summary of these problems, so you can skip it if you already know it.
One of the problems after the big financial crisis is that since 2009, when the recovery began, economic growth has been weak and limited. Although in many countries, such as the UK, there was a maximum level of employment, this, contrary to expectations, was not accompanied by an increase in wages. Consequently, employers could keep staff without raising their salary.
But for investors, the last decade was a real holiday thanks to the policy of quantitative easing around the world, which excluded "ordinary" people. Central banks, led by the Federal Reserve, followed by the Bank of England, the European Central Bank and others, printed trillions of dollars, bought securities and lowered interest rates on government bonds, which naturally forced investors to look for reliable income in other investment objects.
That is why subsequently the assets grew so strongly in price. The most obvious examples are the longest bull market in the entire history of the United States and the fastest rising real estate prices in cities around the world.
S & P 500 quadrupled during the bull market
Price per foot squared per decade, including the lowest and highest rates.
Source: Knight Frank Research; Macrobond; S & P Core Logic Shiller; Douglas Elliman / Miller Samuel; StreetEasy; Ken Corporation
The safe countries, from Australia and New Zealand to the United Kingdom and the United States, saw massive investments from China, with first-class cities growing first, but the rest quickly followed. And although the first to grow elite real estate, behind it, of course, began to grow assets of lower classes. Business was not limited to residential real estate - real estate of all types grew, from warehouses to shops.
Of course, if you go back to our starting point, it was accompanied by stagnation or a limited increase in salaries, which means that for many people housing has quickly become inaccessible.
The ratio of the price of housing to income in different countries
Who bought all this housing? Not those who live in it. The number of people aged 25 to 34 who rent housing in 2004-2014 increased from 20% to 46%, while the number of owning their own housing fell from almost 60% to 36%. The number of homeowners of all ages in the UK fell from 70.9% in 2003 to 62.9% in 2015, the lowest in more than 30 years.
Income was received by institutional investors and those individuals who had capital for investment (mostly foreign buyers, who began to push up global housing markets). Real estate investment firms have rapidly grown in size in an attempt to satisfy demand from pension and insurance funds, desperately looking for an asset class capable of providing them with the desired income.
What about the stock market? There is a similar story. Income was received by institutional investors, and the proportion of the adult population investing in stocks steadily declined:
Share of American adult population investing in the stock market
The difference in the value of investment in stocks between the 75th and 25th percentiles
But if all of these companies benefit from the economic boom, then employees probably get rewarded in the form of a growing share of corporate income? Do not rush to conclusions.
The share of employees from corporate income has not recovered
Millenial fall without a rise
Above, the deterioration of the situation in society as a whole is considered, but recessions do not affect everyone the same way - the young take on the blow of recession. There are several reasons for this, but they are mainly related to the fact that young people are more likely to work at less reliable jobs (retail, seasonal or temporary work), having less experience or qualifications, and also have not been able to accumulate assets (which, like we saw, brought much more income). As a result, the younger generation was under attack from all sides:
- Their earnings fall the fastest.
- House prices are rising, making it unaffordable for them.
- Many potential employers are leaving the business, as physical retail trade has suffered from poor commercial conditions and the structural vulnerability of the sector to changes in consumer preferences, for example, in the direction of online stores.
Real growth in the median earnings of workers since 2008, by age group
The bad news for the younger generation doesn't end there. Pension programs are now generally less favorable, and by the time today's young people can use their savings, there is a big deficit waiting for them, and even the retirement age is growing. There are other problems - for example, the extortionate cost of education in countries such as the United States.
Despair and despair
As it should be obvious, all of this creates in sum not predicting any good conditions for the average person:
- People feel poorer, because even if real wage growth outpaces inflation, it lags behind the rise in housing prices. Governments are trying to agitate for home ownership, as it provides security and protection after retirement.
- Investments have reached historic highs - but most people do not benefit from this, since the number of owners of shares has dropped significantly.
- Among those who have invested, the majority will see a profit only after retirement.
- People now not only compete in their region, but also compete for global capital seeking shelter.
As this capital ended up with obvious storage sites, it led to more and more new niche booms. This includes works of art, whose sales regularly hit records, as well as luxury goods, such as watches.
Cryptocurrencies have become another example. Given the huge amount of capital that needed to be used, it was enough to send only a small part of it into cryptocurrency in order to have a noticeable impact. Although the inflow of institutional capital was limited due to the strict parameters of investment and the unconfirmed status of cryptocurrency as an asset class, there are no such restrictions in the case of wealthy individuals and family offices.
Transition from investing to gambling
Speculative investments have always existed, as in the case of penny, or, as they are called, "lottery" shares. Fraud has always existed.
But the features of the present time are as follows:
- Mobile phones and the ubiquitous Internet connection simplified access and made it possible to monitor investments around the clock.
- In order to retain and exploit users, gamification is increasingly used.
- Thanks to the Internet and social networks, it has become easier to create a global fear of loss of profits.
What if I tell you about the site, where you can invest in assets, monitor their daily gains or losses in the form of red and green arrows, trade short or long term and receive dividends, and where is a split of shares possible? Sounds like a normal stock exchange, right?
Not.
This is not a stock exchange, but the Football Index, a self-proclaimed “football stock market,” which allows investors to buy players' shares to create an investment or trading portfolio.
There are many similar examples where a advertised tote is hidden under the guise of a new speculative asset. But users treat it as an investment:
- Player scores are falling. The company's profit falls.
- The player leaves for China. The company is removed from listing on the stock exchange.
- The player injures the knee. After the shocking news, the company's shares fall by 90%.
- The player is injured, incompatible with his further career. The company becomes bankrupt.
- The player dies. The company stops bidding.
- Player killed. Sneaky trader (a la Nick Leeson) kills the company etc.
Other examples include the popular fantasy sport in the United States, which has become a way of gambling, bypassing tough laws. Draft Kings and Fan Duel are now earning more than $ 200 million a month, allowing users to make sports bets, but the “professionals” who make thousands of bets prevail here, leaving the average person only a shadowy chance of success.
It can even be argued that investing for the first time equated gambling with the advent of spread betting, which rapidly gained popularity in the late 1990s and early 2000s. Spread betting allows investors to bet on asset price changes without having to own these assets. It also allows for a large leverage and, like gambling, is exempt from taxes in the UK (by the way, the UK is the market leader in both gambling and spread betting).
Here is a typical description of spread betting:
“Spread betting, unlike long-term equity investments, is a fascinating method of short-term investing, where traders see results instantly. Originating at the microscale, spread betting allows traders to win (and lose) in one day, hour, or even minute, depending on your preferred trading speed. ”
Hm Clearly reminiscent of gambling. The Financial Services Authority of the United Kingdom calculated in 2016 that 82% of participants in spread betting are losing an average of 2,200 pounds.
This transition is accompanied by more and more gamification boring without this activity. Investment firms are now turning to gamification to attract young audiences, private capital management firms introduce various decals and prizes to inspire savings or investment, and asset management firms hire video game designers to improve customer interaction.
However, in each individual context, this has its meaning. The investment manager wants to see millenials among his clients. Millennials like gamified systems! Logic is easy to see. However, as a result, certain gaming and investment operations occur somewhere in the middle, blurring the boundaries between gambling and investment even more. Gaming companies discovered this trend many decades ago: in order for people to continue to play, you need to stimulate them with the help of lights and sounds, so that they feel like winners - even if in fact they are not.
Marketing Driven Development
Before we look at how this all relates to cryptocurrency, let's briefly review how these speculative investments / gambling are driven by marketing.
Firstly, the traditional press was too slow to report new areas, such as cryptocurrencies, and, unfortunately, she could not write about them impartially. This happened against the background of problems faced by journalists of all stripes, including incompetent business models and the Internet. The press has declined responsibility for reports on such areas as cryptocurrency, giving way to the unregulated world of social networks.
Social networks allowed interested persons to advertise their companies around the clock. For example, venture capitalists zealously reiterate their faith in cryptocurrency, openly offering their own services. "Opinion leaders" on Twitter advertise everything they are paid for. Cryptocurrencies in this are not unique - in the same way, you can find Football Index analysts with a growing number of subscribers.
All this is in the order of things, since there are no legislative norms (or, at least, there wasn’t until recent bans). Compare this with the strictly regulated "real" investment industry. Investment managers don’t just write about opportunities at every corner - regulation makes this much more complicated.
Social networks also allow you to communicate and debate, which enriches the space, but too often these opportunities are limited. However, by linking this with the gamification discussed earlier, services like StockTwits allow investors to communicate easily, just like Twitter allows you to spread investment ideas. Again, this blurs the boundaries with “real” investments, as can be seen from the significant Twitter crossover of posts about cryptocurrencies with posts, for example, Tesla.
And one more kind of marketing for submitting gambling as investing concerns advertising with celebrities. See the similarities below?
Cryptocurrencies: the quintessence of marketing "gambling investments"
Cryptocurrencies are a vivid example of this new trend to present gambling as an investment. This is a 24-hour casino, where:
- Thousands of different assets: do not like one? Choose another!
- There is a constant stream of news in social networks and forums.
- There are a lot of companies that make money from volatility and help calculate your profit if you invest on a particular date.
- Prices do not depend on fundamental indicators, but on who can best advertise and manipulate.
Since the industry is just emerging, there is no statistics on those who became addicted to gambling through investing in cryptocurrency. But I would be interested to know how many people the last two years cryptocurrency forever destroyed the brain and risk appetite. It is very difficult to worry about the annual growth of your stock portfolio by 5%, when you see a cryptocurrency increase by 100% per day. People become addicted to gambling for a reason: they contribute to the production of dopamine, like drugs.
Applications like Blockfolio and Delta allow users to check their portfolios at least every minute, providing a dose of dopamine every time a green arrow appears on the screen. The numbers cease to make sense, and many users almost completely lose touch with the real value of their portfolio.
There is no shortage of interesting events on the market. There is always another token that needs to be explored or purchased, each time hoping that this is your lottery ticket to wealth, your Bitcoin or Ethereum. There are even pump-and-dump groups that promise quick profits, even if participants know that they can with equal probability not only win on growth, but also lose on plum.
Unfortunately, as in the case of drugs, the more buzz you get, the more tolerance you develop, and the more risky enterprises are needed next time to repeat the same buzz. Scientific American writes that “in studies conducted in 2003 at Yale University and in 2012 at the University of Amsterdam, pathological players who took tests that measured their impulsiveness recorded unusually low levels of electrical activity in the prefrontal regions of the brain helping to assess risks and suppress instincts. ”
During the bull market, one could constantly hear complaints that the coin had grown “only” by 50% over the past few days or over the last couple of months it grew “only” 5 times. The speed of the market, driven by constant conversations of a huge number of its participants, distorts the perception of time. A day in cryptocurrency is like a month in normal investments. Cryptocurrencies have become their own parallel world, understandable only to those who are in it. Fall by 20%? Just a small scratch. 100% growth? Standard Tuesday. Volatility ceases to cause anxiety and becomes something for granted. Most simply lose sensitivity to it.
Unfortunately, there are millions of gambling addicts, and this number will only grow as the games have become simpler and more varied than ever. In many countries, they are no longer stigmatized (for example, pay attention to advertisements and sponsors in British sports, as well as easing legislation in countries such as the USA), while in others it is easier to deal with them secretly. Again, all thanks to mobile phones and the Internet, which means that in order to make a bet, you no longer have to go to the dull smoky casinos or dubious bookmakers.
There is no convincing evidence of a correlation between gambling and the economic situation. Results vary by country and gambling variety. Nevertheless, given such technological developments as gamification, as well as the challenges faced by the younger generation, the high cost of many asset classes and the increasing availability of gambling in many countries, most likely we will continue to observe the blurring of the boundaries between gambling and investing. Probably, cryptocurrency is only the first swallow.
