Everyone’s a Speculator
All assets are speculative assets.
A tendency prevails to make a sharp distinction between such purely speculative ventures and genuinely sound investment. The distinction is one of degree only. There is no such thing as a nonspeculative investment. In a changing economy action always involves speculation. Investments may be good or bad, but they are always speculative. A radical change in conditions may render bad even investments commonly considered perfectly safe.
— Ludwig von Mises, Human Action
It is common for critics to call into question the economic rationality of bitcoiners for accumulating and saving bitcoin by claiming that bitcoin is nothing but a “speculative asset.” The insinuation is that bitcoin is worthless and derives value solely from a series of scams or games of greater fools. While this smug attitude allows a critic to feel above it all and cast bitcoin aside as a technology and asset beneath their dignity, such language betrays them, as these aspersions reveal misunderstandings of basic economic thinking. The simple reality is all action is speculative action, and all assets are speculative assets. The question that must be addressed is not if but how we should speculate on bitcoin.
Action, Uncertainty, and Risk
If the future was perfectly predictable, there would be no need to make economic choices. There would be no ability for a choice to have an impact on the future, because the future would already be predetermined. That humans act with the intent of affecting future conditions to their benefit implies a fundamental and inescapable uncertainty about the future.
Uncertainty exists for two reasons. First, we do not know enough about natural phenomena such that we can predict all future natural conditions, and we likely never will. Second, human preferences are always in flux. People change how they value goods from moment to moment. New knowledge and experiences shape their ideas about the best means to attain given ends, or whether they want certain ends at all.
Understanding uncertainty requires differentiating it from risk. In Human Action, Ludwig von Mises does this by explaining different types of probability that actors must deal with. We always deal with insufficient knowledge to make definite claims about the future, but we are also not always without any knowledge at all. The two types of probability, which he calls class probability and case probability, are dealing with what kind of knowledge we lack.
Mises defines class probability as such:
Class probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class.
When we roll a die, we know there is a one in six chance of any particular number being rolled, but we have no knowledge about which number will actually be rolled. Likewise, we can come to know the probability of a disease or injury inflicting a population, but we don’t know ahead of time who in that population will be stricken. When we have enough knowledge and certainty to deal with such a class of events, we are dealing with risk. The probability of outcomes are objective, calculable, and predictable, and such probabilities are insurable.
However, we can’t have this level of certainty for all events, and here we deal with case probability and uncertainty.
Case probability means: We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing.
Human action is based on subjective and qualitative value, rather than measurable quantitative data. It is thus impossible to calculate different probabilities of economic outcomes. We might be able to use factors such as past preferences to help make a judgment about the outcomes of action, but we can’t use this to place calculable frequencies on the outcomes. Mises uses the example of a football game. Past victories for one team might give us reason to believe that they will win again, but that does not guarantee a loss for the underdog. In fact, if this were the case, the game would be boring and pointless.
In summary, risk deals with events whose frequencies can be calculable and is dealt with using insurance. But most uncertainty that humans face deal with events that are unique to each individual circumstance, and thus are not insurable. We must use other means to deal with uncertainty.
Gambling, Engineering, and Speculation
Mises identifies three ways in which actors deal with uncertainty: gambling, engineering, and speculation.
Gambling is dealing with class probability and risk, but through betting on an individual case.
The gambler knows nothing about the event on which the outcome of his gambling depends. All that he knows is the frequency of a favorable outcome of a series of such events, knowledge which is useless for his undertaking. He trusts to good luck, that is his only plan.
A gambler knows a particular dice roll comes up only one sixth of the time, but he bets on the next time being the one. Insurance from the point of view of the insured is a gamble, because while they pay a premium reflecting the frequency of a bad event occurring, it may never actually happen, and the premium would have been paid for nothing. Every day, people gamble that they won’t be hit by a car or struck by lightning. In a sense, you can never remove an element of gambling from life (unless perhaps you are Phil Ivey).
On the other hand, if someone has enough technical knowledge to deal with natural phenomena with a sufficient amount of certainty, an actor can deal with the future through engineering.
The engineer, on the other hand, knows everything that is needed for a technologically satisfactory solution of his problem, the construction of a machine. As far as some fringes of uncertainty are left in his power to control, he tries to eliminate them by taking safety margins. The engineer knows only soluble problems and problems which cannot be solved under the present state of knowledge. He may sometimes discover from adverse experience that his knowledge was less complete than he had assumed and that he failed to recognize the indeterminateness of some issues which he thought he was able to control. Then he will try to render his knowledge more complete. Of course he can never eliminate altogether the element of gambling present in human life. But it is his principle to operate only within an orbit of certainty. He aims at full control of the elements of his action.
A bicyclist may never know when he might take a spill, but if he wears a helmet produced by a competent engineer, the uncertainty of whether or not his bicycle trip will end with his head cracked on the pavement is dramatically reduced, allowing him to be more certain in his ability to get where he needs to go in one piece.
When dealing with matters involving people’s valuations of goods, however, humans must engage in speculation:
In the real world acting man is faced with the fact that there are fellow men acting on their own behalf as he himself acts. The necessity to adjust his actions to other people’s actions makes him a speculator for whom success and failure depend on his greater or lesser ability to understand the future. Every investment is a form of speculation. There is in the course of human events no stability and consequently no safety.
Preferences can change for any reason, or no reason at all. A good that is valuable today might not be tomorrow, or vice versa. Actors deal with this by speculating. They buy or sell goods today based on how they believe conditions will be tomorrow. That being said, these decisions are not made in a vacuum. Actors use their knowledge about the state of the market as it is, as well as knowledge about preferences, beliefs, past actions, etc., to make judgments about the future. They structure their production based on these speculations in order to attempt to bring about this future, so as to make a profit. However, they profit only if they make correct judgments about what people actually come to want. Since the future is uncertain, they can also make entrepreneurial errors by producing goods of less than expected value to others and end up with losses. The most successful entrepreneurs are those who are most adept at routinely anticipating how people will act in the future, while those who are unable to do so face losses and can eventually go out of business.
Both profits and losses of any actor, in turn, serve as learning opportunities for all actors, as they signal to others how they should adjust their judgments and structures of production to better anticipate the future and provide others with the goods they need. Uncertainty and speculation, then, are at the root of the market process. It is incumbent upon all actors to learn how to respond to market signals, generated by people’s revealed preferences and actions, if they wish to make profitable speculations and productive ventures that improve the future for themselves and others.
All Assets Are Speculative Assets
The future is always uncertain, because there are no constants in human action. Speculation is unavoidable. All action is directed at improving future conditions, but we can only speculate on what the future will hold. Preferences change, including our own. What we want today or what we think we may want tomorrow, we may not want when tomorrow actually comes.
This means that, strictly speaking, every good that we buy and sell is a “speculative asset.” Bitcoin is certainly a “speculative asset,” but so are pencils, cars, and ice cream. While you bought vanilla ice cream today, it may turn out later that you want chocolate, or a completely different dessert altogether. You could not have known this ahead of time. You could only make a judgment based on the fact that you usually desire vanilla ice cream.
Further, if you are speculating on an asset (and you always are), you’re also speculating on all other assets, because the buying or selling of one good necessitates the opportunity cost of not buying or selling another good.
Those who deride “speculative assets” often also resort to the pejorative of “gambling.” This is not always unfair rhetorically, but praxeologically, it is imprecise. While one person may speculate on an asset after sophisticated deliberation (such as a bitcoiner), and another simply off a “hot tip” (such as the average CNBC viewer), they are both using knowledge of input factors that can affect the outcome of the event.
Dealing with speculative assets is not the same as gambling. As described above, gambling deals with class probability, while speculation deals with case probability. When gambling, someone can know everything about the frequencies of events, but that knowledge has no effect on the actual outcome. When speculating, while we do not know all factors affecting an event’s outcome, we can know some. You might not know if you will want vanilla ice cream, but you do know what you tend to like.
Uncertainty and Money
As noted before, an actor who wishes to avoid risk can purchase insurance to deal with expected contingencies. However, since uncertainty is not predictable, there is no insurance for uncertainty. Instead, actors turn to a specific good, the most marketable good, called money.
In “‘The Yield From Money Held’ Reconsidered,” Hans-Hermann Hoppe writes:
Faced with this challenge of unpredictable contingencies, man can come to value goods on account of their degree of marketability (rather than their use-value for him as consumer or producer goods) and consider trading also whenever a good to be acquired is more marketable than that to be surrendered, such that its possession would facilitate the future acquisition of other directly or indirectly serviceable goods and services. That is, a demand for media of exchange can arise, i.e., a demand for goods valued on account of their marketability or resalability.
He continues later:
Because money can be employed for the instant satisfaction of the widest range of possible needs, it provides its owner with the best humanly possible protection against uncertainty. In holding money, its owner gains in the satisfaction of being able to meet instantly, as they unpredictably arise, the widest range of future contingencies. The investment in cash balances is an investment contra the (subjectively felt) aversion to uncertainty. A larger cash balance brings more relief from uncertainty aversion.
Note that this does not free money itself from uncertainty and speculation. Anyone who acquires money is speculating that the acquired cash balances will be more valuable in the future than any present investment and that the purchasing power in the future will be at a satisfactory level. Bitcoin may be a speculative asset, but so is the US Dollar.
Conclusion
Given all assets are speculative assets, including money, it is incumbent for us to examine speculative activity based on the knowledge and judgments being made to make the speculation, rather than just shutting our minds off with linguistic thought terminators.
For the case of money, we can examine how well the qualities of a good allow it to withstand different kinds of uncertainty, whether through its natural properties or human engineering, so as to be most capable of commanding the highest marketability of all goods. This does not guarantee adoption of that monetary good, but it does allow us to make sense of the adoption that does happen and make a judgment about whether adoption can or will continue.
We will investigate that question next in a republished article on the topic.
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Great post. Thanks!
Thanks for this piece. So clear and informative.