15 Mar 2026
Like most universities, my college had a writing skills requirement but was a bit embarrassed about it. Rather than force the engineers to take actual liberal arts courses, they offered “current interest” courses which satisfied the requirement. One of mine was on fintech, which in 2020 mostly meant crypto.
One of the seminar sessions focused on the fundamental drivers of the price of bitcoin (or the lack thereof). One of the other students asked the professor, “isn’t this just gambling?”, to which he replied, “what do you think separates gambling from investing?”.
The question has stuck with me for a while, and I thought it’d be interesting to write a blog post about how my thoughts on the topic have evolved.
My Answer at the Time
Gambling and investing both involve putting capital at risk, with some chance of “winning” and growing the capital and some chance of “losing” and reducing the capital.
My first thought was that what separated the two activities was positive expected value. Most games at a casino have a house edge; over the long run, you expect to lose money. The things we typically think of as investing (fixed income and equities) have well-documented historic positive returns. Wikipedia agrees with my undergrad definition of investing:
Investment is traditionally defined as the “commitment of resources into something expected to gain value over time”.
I’ve revisited the idea since taking the class, especially as I began my career in investment banking. When my team sells bonds, they’re usually financing public improvements like roadwork, utility line extensions, water and sewer, etc. The development increases the value of the parcel of land, and our investors get paid back from the subsequent increase in property taxes (or sales taxes or whatever else). It’s pretty classic investing - bondholders put up money today that is used to build some project, and they get paid back from part of the cash flow coming off of the project. My team sells muni bonds, so the cash flow stream is usually a tax stream, but this generalizes to other sorts of fixed income in a straightforward manner.
Investors are paid a steady stream of coupons which represent their return. There is some risk that the project doesn’t get built or the cash flows from it aren’t sufficient to pay off the bonds, and they’re compensated for those risks. The intent of all parties involved is for them to have a positive expected value.
Whether investors are being compensated appropriately for the risk they’re taking, in my eyes, doesn’t affect whether they’re engaged in investing or gambling. Risk-adjusted returns are a measure of how good they are at investing, not a determinant of whether they’re engaged in the activity.
Already, you’re probably seeing the problem with focusing on expected value. I’ll get to that, but first, let’s think about equities for a moment.
Equity investing is a bit different, but I think it feels like investing to most people for similar reasons. It’s well-documented that public equities have historically delivered positive returns to investors over most time horizons. If you take a 30,000 foot view, you could say that owning a bunch of different stocks which are exposed to many different aspects of the economy should more or less capture growth in the economy. Furthermore, owning a stock gives you an ownership claim over the company. You’re entitled to a share in the profits of the company, mediated through its leadership who may decide to invest back into the enterprise, issue a dividend, or do stock buybacks.
Problems with the Definition
The obvious question here is, how do you figure out if an activity has positive expected value?
First, let me defend my undergrad self just a bit. Clearly, traditional Vegas table games have a negative expected value for the player; you can calculate the odds of different outcomes in a game of blackjack, for example, and realize that you’re not expected to win. So while it’s not easy to determine if a traditional investing activity has positive EV, you can label some things as gambling with this simple definition.
One more observation: casinos have a positive edge. So even in the most obvious example of gambling, one of the parties involved has positive EV. The problem is that not everyone does.
With that in mind, let’s complicate the definition: for an activity to be investing rather than gambling, everyone involved should have a positive expected value. The activity should be a positive sum game, insofar as everyone involved thinks they’ll be better off for engaging in it.
Return to the example of debt financing for a real estate project. The developer expects to build their project and earn an acceptable return from it. The bond investor expects to invest their funds and earn an acceptable return from it. The money coming in to the system is from users of the project, who wouldn’t show up and spend their money if they didn’t feel like it was worth it.
Sounds like everybody wins. It’s easy to see that equity investing fits the bill, as well.
Other Examples: What Counts and What Doesn’t
Consider a pro poker player sitting down at a table with a bunch of newbies. He or she has a positive expected value, while the rest of the table has a negative expected value. This should fit any reasonable definition of gambling, rather than investing. That’s an important point - you can engage in gambling with a positive EV, as long as your winnings are coming from others losing.
There’s a case to be made that sports betting could count as investing under this definition for a certain kind of bettor. There are people out there who develop good models for game outcomes or who find arbitrage opportunities between different sportsbooks. They can reasonably claim to have a positive expected value. The bets they place, arguably, represent a kind of ownership in the potential payoff if the bet goes their way. Predictions markets (which are mostly sportsbooks, by volume) look similar. Some market makers are beginning to wade into sports betting by way of prediction markets. This is a topic worthy of more discussion, but I don’t think it’s useful to write off sports betting or prediction markets as purely investing or gambling. There’re more interesting things going on in that space.
A high frequency trading shop also seems to be engaged in something other than investing. When you hold positions for an extremely short period of time, that just feels very different from buying an index fund or investing in a Treasury note. You don’t care about the long-term prospects of the business in the same way a traditional investor does. However, many HFT shops have done very well for themselves historically and we have no reason to think they won’t continue to do so. It’s not gambling either. I think it’s useful to think of short-term trading and market making activities as a third category.
Bitcoin and other crypto currencies present an interesting case. Many would argue that they have no fundamental value, or, more snarkily, that the correct price for these tokens is \$0. The market is clearly full of scams, too. Early investors in projects ride hype waves, wash trade to bring attention, then sell at the top. There’s no shortage of pundits who will tell you the whole thing is a ponzi scheme. For our purposes here, it’s sufficient to point out that there’s no economic activity at the bottom of most crypto projects. That doesn’t mean crypto isn’t interesting or useful, or that there’s no money to be made there. I just don’t think it’s quite right to say you’re “invested in crypto”.