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When did investing become gambling?

When did investing become gambling?

For anyone who has followed crypto in recent years, it is undeniable that those who describe of ‘investing’ in the space usually mean ‘gambling’. This conflation of investing with gambling is in part down to the wider economic situation which has forced a wide section of the population out of traditional investing and into more speculative areas. This is exacerbated by new technology and trends, including mobile phones and gamification, all of which is intended to keep users hooked. Furthermore, these ‘investments’ are also largely marketing led, spurred on through social media, sponsorship and celebrity endorsements.

There are two big factors in play here for those in the western world, both stemming from the financial crisis. The first is linked to real wage growth being low in most developed countries, the second a result of quantitative easing and the decade long asset boom which has seen the richest benefit, and the ordinary person left out. I would argue both factors can be tied in with the desire for lottery type big wins, rather than slow and consistent returns built up over time.

An unequal recovery

This first section, acting as a brief primer to these issues, can be skipped if familiar.

One of the problems since the global financial crisis (GFC) is that since 2009, when the recovery from the GFC began, growth has been flat and limited. Despite many countries, such as the UK, seeing full employment this has not been accompanied by the wage increases that would normally be expected. As such, employers have been able to retain staff without increasing salaries.

Conversely, it has been a decade to celebrate for investors thanks to a decade long policy of quantitative easing measures worldwide, but one which has excluded most ‘normal’ people. Led by the Federal Reserve and followed by the Bank of England, the European Central Bank and others, central banks printed trillions of dollars in the form of buying securities, pushing government bond interest rates down which naturally led investors chasing safe returns into other investments.

This is why assets have subsequently risen so much, with the most obvious examples of this being the United States’ longest bull market in history and the rapid appreciation of real estate in cities worldwide.

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Although the appreciation since 2007 looks low for a number of cities, remember too that real estate was one of the primary beneficiaries (and causes) in the lead-up to the GFC, as they became a financial instrument upon which to speculate. As such, prices in 2007 were already high — and many markets swiftly doubled in a matter of years, with the likes of Shanghai nearly quadrupling.

Safe countries from Australia and New Zealand to the UK and the US saw massive investment from China, with Tier 1 cities rising first, swiftly followed by the lower tiers. And whilst initially it was super prime properties that rose first, this was of course then followed by prime and entry level assets also rising. Not only was it constrained to residential — so too did real estate of all kinds rise, from warehouses to shops.

Of course, as to our initial point, this was accompanied by stagnant or limited wage growth, meaning that houses quickly became out of reach of many.

Again, this chart is from 2010 when prices had already begun to recover in many markets and following the previous decades rises. Extend back to 2000, or 1990, and this chart would look far worse. Affordability in London was fairly flat for over three decades, with house prices c. two-three times median earnings from the 70s through 90s. This rose to over ten times by 2010, a number that seems pathetic compared to the true unaffordable giant of Hong Kong, which sees median earnings c. 19–20x income in 2017.

So who were buying all these houses? Well, it is not the people living in them. The number of 25–34 year olds renting has risen from 20% to 46% from 2004–2014, with home ownership falling from just under 60% to 36%. Home ownership as a whole fell in the UK from 70.9% in 2003 to 62.9% in 2015 — the lowest rate for over 30 years.

Instead, returns accrued to institutional investors and individuals with capital to invest (most foreign buyers, who began to prop up housing markets across the globe), as real estate investment management firms exploded in size in an attempt to meet the demand of pension and insurance funds who were desperate for an asset class that could offer them the returns they craved.

But what of the stock market? It is a similar story. The returns have accrued to institutional investors, with the proportion of adults investing in stocks on a steady decline:

Furthermore, the divergence between the larger investors and the smaller also continues to rise, as highlighted by the difference in portfolio values between the 25th and 75th percentiles:

However, with all those companies benefiting from a booming economy, surely employees are seeing some reward through a rising share of corporate income? Guess again.

Although this has primarily focused on western nations, Japan is a notable example of an economy stagnating. Wage growth is flat in part because the share of corporate income has remained at c. 43% since 1971. Economists forecast a 1% pay rise in 2018 for Japanese workers — meagre, but one which would be the largest increase since 1997.

The Fall and Fall of the Millennial

The above looks at the worsening situation for society as a whole, but recessions do not affect equally, with the young taking the brunt of the falls. There are a number of reasons for this, but they are largely tied to the younger being more likely to be in less secure work (retail, seasonal or temporary work) with less experience or qualifications to fall back on, as well as not having had the chance to build up assets (which, as seen, performed far better). As a result, the younger generations found themselves buffeted on all sides as they saw:

  • Their earnings drop the steepest

  • House prices rise, a development that left them on the outside looking in

  • Many natural employers go out of business, as physical retailers were hit by poor trading conditions and the sector’s own structural vulnerability to changing consumer attitudes such as e-Commerce

The bad news doesn’t end there for younger generations. Pension schemes are generally now less favourable, are facing large deficits by the time they will come to make use of their savings themselves and are being attached to generally increasing retirement ages. And there are other issues too; for one, the extortionate cost of education in countries such as the United States.

Doom and Despair

As should be obvious, all of this adds up to a foreboding set of circumstances for the average person:

  • They feel progressively worse off, because even if real wage growth is outstripping inflation, it is not outperforming house price increases. There is a reason why governments try to promote home ownership — it provides security and is a safety net for those retiring

  • Investments are at all time highs — but most have not benefitted from it at all, given stock ownership has dropped dramatically

  • Of those who have invested, most will be through their pensions and therefore will be struggling to see the benefit right now

  • They are no longer simply fighting competition in their own localised area, but also now fighting global capital desperately seeking a home

As this capital has increasingly run out of obvious places to be stored, it has led to more and more niche booms. This has included the likes of the art world becoming used to sales regularly breaking records, but also luxury goods such as watches.

I have also contended previously that crypto has become another extension of this. Given the huge amount of capital looking to be deployed, it would not have taken much to be diverted to crypto to have a significant impact. Although institutional capital to date has been limited, owing to the strict parameters of investing they must adhere to and crypto’s unproven status as an asset class, there are no such limitations on HNWIs and family offices.

The shift from investing to gambling

There have always been speculative investments, with penny stocks often known as ‘lottery stocks’. Furthermore, there have also always been scams.

What is arguably different now is that:

  • Mobile phones and omnipresent Internet connections have facilitated easier access and monitoring of investments 24/7

  • Gamification is increasingly used as a means to retain and exploit users

  • The Internet and social media has made it easier to create global FOMO

Well, what if I told you of a site in which you could invest in assets, with the website showing said assets accompanied by red and green arrows denoting their daily gains and losses? Where you can trade for the short or long term? Where dividends are paid out and where share splits take place? Sounds like a regular stock exchange right?

Wrong.

This is not a stock exchange, but rather Football Index, the self proclaimed “Football Stockmarket” which allows investors to buy shares in players in order to put together a portfolio for investing and trading.

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There are countless examples of this type of new venture, masquerading as a speculative new asset but being nothing more than glorified gambling. However, users treat it as if it were an investment:

Other examples include the likes of fantasy sports in the States, which has metamorphosised into a means of gambling to get around tight regulations. Draft Kings and Fan Duel now generate over $200m a month through allowing users to gamble on sports, but it has become dominated by ‘professionals’ who submit thousands of entries, leaving the average person with a fleeting chance of success.

Indeed, it could be argued that the first shift to equate gambling with investing came with the rise of spread betting, which soared to popularity in the late 90s/early 00s. Spread betting allows investors to bet on the price movement of an asset, without having to own the underlying asset itself. It also allows for heavy leverage and, like gambling, is tax exempt in the UK (as an aside, the UK is a market leader in both gambling and spread betting).

Here is a typical description of spread betting:

Spread betting is, unlike long-term stock investing, an exciting, short-term investment method, where traders see results as they happen. Taking place over a micro-scale in investment terms, spread betting allows traders to win (and lose) in just one day, hour, or even minute, depending on how fast-paced you like your trading.

Hmm. Sure sounds a lot like gambling. The FCA calculated in 2016 that 82% of those who spread bet lose money, to the tune of £2,200 on average.

This shift is accompanied by increasing gamification of otherwise dull activities. Witness investment firms now turning to gamification to try and appeal to younger audiences, with wealth management firms adding badges and rewards a la FitBit to encourage people to save/invest or asset management firms hiring video game designers to improve customer interaction.

However, it makes sense in each individual context. Investment manager A wants millennial customers. Millennials like gamified systems! It’s easy to see the rationale. It will though arguably have the effect of seeing certain gambling and investment operations meet somewhere in the middle, further blurring the line between gambling and investment. Gambling companies figured this trend out decades ago; to keep people gambling, you need to give them lights and sounds to stimulate them and make them feel like they’re winning — even when they’re not.

The rise of marketing driven investing

Before we look at how this relates to crypto, let us briefly examine how marketing drives these speculative investments/gambling.

Firstly, the traditional press has been slow to report upon new areas such as crypto and then have unfortunately lacked the capability to do so in a rigorous manner. This is set against issues facing journalists of all walks, including unsustainable business models and the Internet among others. The press have abdicated their responsibility to report upon areas such as crypto, leaving a void for the unregulated world of social media to dominate.

Social media has allowed those with vested interests to have 24/7 adverts for their companies. For example, VCs talk earnestly about their belief in crypto, never more than a naked offering for their own services. Twitter ‘influencers’ shill whatever they’re being paid to shill. This is not confined to Twitter; you will find FootballIndex analysts with increasing amounts of followers too.

All of this is fine, because there are no regulations governing them (or weren’t prior to recent crackdowns anyway). Contrast this to the heavily regulated ‘real’ investment industry. There is a reason why investment managers do not post much about opportunities to all and sundry; it is so regulated as to make it very difficult.

Social media also allows for debate and interaction which enriches the space, but all too often this is sidelined. However, linking in with the gamification previously discussed, services such as StockTwits allow investors to connect easily, just as Twitter affords for the dissemination of investment ideas. Again, this blurs with ‘real’ investments, with significant cross-over between the likes of Tesla Twitter and Crypto Twitter for example.

A final strand of marketing activities for gambling dressed up as investing comes with the celebrity endorsements and sponsorship. See the similarity below?

Crypto: The ultimate expression of marketing driven ‘gambling-investment’

Crypto exemplifies this new trend of gambling dressed up as investment. It is a 24/7 casino which:

  • Offers thousands of different assets — don’t like one? Pick another!

  • Has a continuous news stream, all played out publicly on social media or discussion boards

  • Filled with companies that make money off volatility and which help you calculate your profits if you’d invested at date X

  • Sees valuations based not on fundamentals, but on who can market and manipulate best

Given the nascent state of the industry there is no statistics on those who have become addicted to gambling through crypto investing available. However, I would be interested in seeing the amount of people who have had their brains and risk appetites ruined for life by the past two years of crypto. It is very difficult to care about a 5% annual increase in your stock portfolio when you are used to seeing 100% daily increases in crypto. There is a reason people get addicted to gambling; it is because it facilitates dopamine releases in a similar manner to drug use.

Apps such as Blockfolio and Delta allow users to check their portfolios every minute if they so wish, providing a dopamine hit with every green arrow that flashes on the screen. The numbers don’t feel real, with many users almost completely divorced from the reality of what their portfolio is worth.

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There is never a shortage of something interesting happening in the market. There is always another token to research, to buy into, always that hope that this is your lottery ticket to riches, this is your Bitcoin or Ethereum. There are even pump and dump groups offering the promise of quick profits, even though participants know that they are just as likely to be dumped on as they are to be in the pump.

Unfortunately, as with drugs the more you get of the high, the more you build up a tolerance to it and need ever more risky ventures to repeat such highs. Scientific American noted that “in a 2003 study at Yale University and a 2012 study at the University of Amsterdam, pathological gamblers taking tests that measured their impulsivity had unusually low levels of electrical activity in prefrontal brain regions that help people assess risks and suppress instincts.”

During the bull market there were routinely complaints that a coin wasn’t mooning, because it was ‘only’ up 50% in the past few days or because it had only gone 5x in the past couple of months. The speed of the market, driven by the number of those active in it all constantly talking, distorts time. A day in crypto is like a month in normal investments. It became its own parallel world, understandable only by those within it. Down 20%? A mere scratch. Up 100%? Standard Tuesday. Volatility becomes less a concern than just a fact. Most simply get numb to it.

Sadly, gambling addiction affects millions and that number will only grow because the act of gambling is easier and more varied than ever. It is being destigmatised in many countries (see the number of adverts and sponsors adorning British sports as well as the relaxing of legislation in countries such as the US) and easier to do surreptitiously in others. This is again thanks to mobile phones and the Internet, meaning gone are the days where to gamble meant visiting a smoky and depressing bookmakers or a shady back-alley bookmaker.

There is no conclusive evidence proving a correlation between gambling and economic conditions, with results mixed depending on country and the gambling activity in question. However, given technological developments such as gamification, combined with the challenges facing younger generations, with many asset classes looking expensive and gambling becoming increasingly acceptable in many countries, it is likely that we will continue to see a blurring between gambling and investing. Crypto is likely to be just the first of many.

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