Speculation is a double-edged sword. It can acknowledge and dis-acknowledge value.

The Good Edge:

In economy, it plays the key role of price discovery and maintaining liquidity.

Without these, exchange of goods is not possible and without exchange there is no economy.

Let me quickly explain – For exchange of goods to function properly, it needs to allocate prices in a fair manner (supply and demand) so that the buyers and sellers agree to exchange.

Price Discovery:

There are two things constant in any economy that impacts exchange of goods-

creation ( new products, companies, commodities etc),

change ( new circumstances ex: weather disrupting crop production or war leading to oil shortage etc.)

Speculators perform the key function of keeping an eye on the change, analyze the change and propose the impact– of creation by proposing value and of change by betting on the adjusted value etc.

Speculators are risk takers. They sense the change and invest in it for their own personal gains. So imagine this as a debate competition where participants are discussing facts, analyzing pros and cons for a common conclusion. A result that has been debated enough is somewhat agreed (just like polls) and regarded as fair.

Maintaining Liquidity:

But, let us imagine for a second a world without speculators - there are producers and there are consumers. However, this is not enough for efficient exchange of goods. There should be the right equilibrium between producers and consumers. Without this, the system can collapse or deadlock as producers can lose incentive to produce and consumers can lose their willingness to buy.

For example: Toni likes fishing and Eli loves to eat fish. Toni believes he worked hard to fish and hence, it should cost 100$. However, Eli would like to pay 50$ for the fish. Obviously, Toni and Eli don’t know each other and are complete strangers (they may fall in love later on but that’s out of scope of this article). They are both busy with their lives – Toni is fishing and Eli is getting hungry.

Here comes – Rich.
Rich is only interested in finding opportunities to make money. Rich sees the mismatch beforehand and tries to find a solution.

He can solve this in multiple ways –

1. He can go talk to Toni and strike a deal by buying in bulk at cheaper price and then, sell it to Eli and her neighbors.
2. He can also invest in Toni’s business by buying him fishing net so he can fish more quickly and hence, effectively reduce the unit price.

3.Rich can also raise money from some of his influential friends or public and give it to Toni.

Both of these alternatives require money – buying in bulk needs investment, finding Eli may cost fuel and fishing net does not come free as well. Thus, Rich by risking his money and some problem solving has helped the exchange to take place, which could otherwise have been resulted in a deadlock.

The Evil Edge:

But, it is not all that Rosy as this gives an added advantage to Rich - control of the fishing market. In order to make more money, he can use this to manipulate the market by hoarding fish to create artificial scarcity or making Eli eat more fish than she can etc. (as he knows how to flirt with Eli and understands her psychology enough to trick her).

Speculators come in all shape and sizes. They can be smart and rich or dumb and rich, good or evil but an important subset of them bring in what we call the smart money. Smart money knows how to grow itself and also, how to protect itself. Hence, Smart money is generally the first one in and the first one out.

We will come back to this later again.

Coming back to Crypto-Economy…

Warren Buffett – the biggest speculator of all times once said:

"Stay away. Bitcoin is a mirage. It's a method of transmitting money... A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? … The idea that it has some huge intrinsic value is just a joke in my view."

Warren Buffett is a God to many and personally to me. But him saying this goes against the people who believe in Bitcoin and want it to succeed. This challenges the believers to come up with a better pitch. So the believers (miners, investors etc. who already have blood in the game) start to dig up and come up with what makes sense. They come up with history, ideas and strategies to solve problems that suggests that this can be a success and sell it enough so there is a viable equilibrium. No one knows what is actually going to happen, they are all speculating but thats the key.

The believers get in the mode - put together a community to help solve problems, increase investments to build infrastructure, do massive selling via blogs and news to create a game changer hype story. What we get is what we see today - the hype and utopia, applied innovation and creativity and the funding.

When you see a hype story you soon start to see crowds. Crowd is the masses who become curious and want to know more. But the crowd wants to see success without getting too much into the depth. They lack patience and all they want to see is a good movie in which they want to act to achieve celebrity success. They are not dumb but it will just take them a little more time to be smart in this space as they got into this late.

Whereas, the speculators are up to speed. They have insider information and hence, smarter than the crowd at this time. They are stuck in this dilemma - they know the actual value creation will take time but crowd will not accept it. But without the crowd they will lose all their money. So they keep trying harder on both sides - push the producers to keep building that turns out to be something useful and on the other hand, keeping the crowd convinced that there is light and its coming.

The history suggests that (AI, Machine Learning, Computing and Dot.com), patience of the crowd almost always loses to reality. Crowd creates a bubble and reality cannot keep up with it. Soon the word is out and crowd fall over on its feet.

But the smart subset has already managed out with fat checks. You know there is a bubble when there is a herd and you know it is about to burst the moment you see the end of the herd. Herd does not see end of the herd but smart subset does as they created the process that brought the herd in the first place and they realize that every herd has an end. But the herd only wants to keep running without looking left or right.

Conclusion

Cypto-economy cannot survive or grow without the speculators or the herd. There is a herd today and hence, a bubble. Thus, there will be blood and there will be burst. The fact I am able to write this means crowd is starting to realize. The massive ICO projects have to show results soon. Hard to believe that results will come so soon and easy. But the crypto-economy will progress because they have the time, money and effort. That is all they need to make itself realistically better.

Disclaimer: I am not an economist. I am just a curious mind.