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Investing vs gambling

Definitions

The debate between investing vs gambling is a popular topic among investors. The line between the two are thin and many argue that they are both essentially the same. Let’s look at some definitions by Investopedia:

  • “Investing is the act of allocating funds or committing capital to an asset, like stocks, with the expectation of generating an income or profit.”
  • “(Gambling) means risking money on an event that has an uncertain outcome and heavily involves chance.”

The definition of investing is pretty clear. Investing is when you purchase some financial asset. According to Investopedia, “A financial asset is a liquid asset that gets its value from a contractual right or ownership claim”. The keyword here is “liquid”, which means that a financial asset should have a ready market that you can sell the asset on.

Examples of financial assets

  • Stocks
  • Bonds
  • Bitcoin (You can easily sell Bitcoin on any crypto exchange)
  • etc.

Examples of assets that aren’t financial assets

  • Shares in private companies
  • Any agreement that can’t be publicly traded (since it wouldn’t be a “liquid”)

Some might extend either definitions. For example, some investors might say that “Investing is acquiring productive financial assets“. But let’s use the Investopedia definitions for now.

Obvious cases

Let’s look at some obvious examples of investing and gambling:

Investing

  1. You purchase 10 shares of VTI.
  2. You purchase $500-worth of Singapore Savers Bonds (SSB).
  3. You expand your wedding catering business by acquiring a wedding dress shop.

Gambling

  1. Going to the casino to play blackjack. This is not investing because you’re not buying anything. Instead, you’re placing a bet on some outcome.
  2. Going to the racetrack to bet on the winner of the race.

Tricky (not so obvious) cases

But they’re a few cases that are not so obvious. Some may classify them as investing and some may classify them as gambling.

Purchasing Bitcoin

  • Purchasing Bitcoin can be seen as investing as Bitcoin is a financial asset – it is a type of currency.
  • But what if your goal isn’t in “generating an income or profit”? Many investors who purchase Bitcoin do so because Bitcoin is one of the best stores of value. If the USD or SGD were to crash, Bitcoin would likely be used as a digital gold for people to store their wealth without the control of any central government.
  • Our verdict – We view purchasing Bitcoin as a form of investing. This is subjective because Bitcoin can be seen as a bet (i.e. definition of gambling) but because you are owning a financial asset, this is technically putting money into an investment, which is therefore a form of investing.

Putting money into a Ponzi scheme

  • When you put money into a Ponzi scheme, you’re buying a type of note (or agreement) from a company that promises to pay you interest back over time. While a note can be argued as a financial asset, we won’t classify it as one as it is not liquid. (i.e. It can’t be sold on a public market.) Corporate bonds can be sold on a public market but Ponzi-company notes can’t.
  • Our verdict – We view a Ponzi scheme as a form of gambling because a note from a Ponzi-company isn’t a financial asset.