There are productive assets and speculative assets.

The Bitcoin frenzy train is back! With Bitcoin halving, the approval of Bitcoin ETFs, and the prospect of interest rate cuts, Bitcoin has once again become the center of attention.

But before jumping on this bandwagon, it’s worth asking—is Bitcoin a productive asset or a speculative asset?

Productive assets generate income for their owners, so we don’t mind holding onto them indefinitely. Speculative assets do not.

To profit from speculative assets, investors need to find buyers willing to pay higher prices for the asset, which is known as the “greater fool theory.”

The greater fool theory posits that as long as someone comes along and buys the asset at a higher price, even though the asset hasn’t generated any income for the owner, we can make money.

This may be profitable for a while, but relying solely on this way of making money is purely speculative, and the party ends when there are no more “greater fools” in the world.

With that in mind, let’s look at which assets are productive and which are purely speculative.

Bitcoin

Bitcoin does not generate income for its holders, so Bitcoin holders can only profit by selling it to others at a higher price.

By definition, this relies on the greater fool theory, making it speculative.

My standard for judging an asset is whether you’d be willing to hold onto it forever. With Bitcoin, holding it doesn’t benefit you; you only profit by selling it.

Bitcoin is a clear example of a speculative asset.

Art

I’ve heard some argue that Bitcoin, because of its scarcity, is akin to valuable art that can appreciate in price.

But the fact is, art is also a speculative asset. Art doesn’t generate income for the asset owner, who relies on selling it at a higher price to make money.

Similar to Bitcoin, art doesn’t produce income, so holding onto it indefinitely yields no return. Most art is speculative.

However, occasionally, if art can be rented out to galleries or museums, rare art pieces might provide some form of cash flow for the owner. If so, rare art can be considered an income-producing investment.

At least with art, it can be seen as a beautiful asset that some appreciate and may be willing to pay to view or purchase as decoration.

Real Estate

Real estate generates income for owners in the form of rent. Rental income provides owners with income that eventually offsets the amount paid for the asset.

Real estate investors can realize investment returns without selling the property. By renting out the asset for a long enough period, they can earn sufficient rental income to offset the property’s cost.

Real estate is clearly a productive asset.

Stocks

Owning stock in a company means owning a portion of that company. It grants you the right to share in profits through dividends.

Therefore, stock investors don’t need to rely on price performance; they only need to collect dividends paid out of company profits for a good return.

However, we can’t paint all stocks with the same brush.

Sometimes, the valuation of some stocks is so high that those who bought in at that price will never recoup their investment from dividends. The only way to profit is by selling to a “greater fool.”

Therefore, stocks falling into this category enter the realm of speculative assets.

Bonds

Bonds are essentially loans provided by investors to companies or government entities. In exchange, the “borrower” pays interest to the investor and repays the full loan amount at the end of the loan term.

Bonds provide investors with a regular income stream, assuming no default, and investors can also recoup their principal at the maturity date.

Given the predictable income stream, bonds are a productive asset, providing cash flow to investors.

Stock Derivatives

Stock derivatives are financial assets whose value derives from the price of stocks. These can be options, futures, warrants, and so on.

Options and other derivatives can provide investors with the right to buy stocks at a specific price before a given date.

However, because stock derivatives have predetermined expiration dates, they are highly dependent on short-term stock prices and are therefore speculative assets.

The difference between stocks and stock derivatives is that stocks pay dividends, while derivatives do not. Most importantly, derivatives have an expiration date, meaning the owner relies on short-term stock price movements to profit.

Bottom Line

Don’t get me wrong. I’m not saying that investing in Bitcoin, art, or derivatives can’t be profitable. In fact, investing in speculative assets has made some people very wealthy. This is because, with a large number of believers in speculative assets, they can continue to appreciate in value.

For example, the narratives surrounding Bitcoin and the current influx of funds into cryptocurrencies have led to a significant increase in the price of Bitcoin over the past decade, creating billionaires in the process.

While speculation can be profitable, it’s a challenging game to play and depends on the narrative surrounding the asset. Furthermore, because assets lack cash flow support, prices may crash, leaving owners with “non-productive” assets that only hold value if someone else is willing to pay more. Personally, this is not the game I want to play. I prefer investing in productive assets that generate cash flow for owners, so I don’t have to rely on narratives or “greater fools” to profit.