Tragedy of Lotteries

Government Lotteries vs ICOs

I do not advocate every financial product out there. Although no person has a right to misrepresent their offer for gain, what they all have is the right to promote their projects. Investors have the right to see the different projects and evaluate them, whether they are brilliantly prepared and presented by highly capable teams, or even incompetently developed by clueless hacks. Not crooks, just hacks.

But let’s see what governments promote as an alternative to ICOs, using the UK as an example.

Looking at the figures, for the year ending March, 2017, the National lottery sales were £6.9 billion. 43% of these “investments” (publicly promoted for their financial upside) were losses for the investors. Forget where that 43% goes, the people generally buy tickets for the upside return. Otherwise they would just volunteer to pay more taxes or pay charities directly.

Lottery ticket buyers invest in long-shots because poor people have a greater marginal utility for higher-reward investments. Of course, higher-reward investments are necessarily higher-risk investments, for why would anyone offer a high reward if there was not a corresponding risk?

In this example, winning a lottery is one way a less-wealthy investor can actually change their social status. Governments take advantage of this reality with their lotteries, where they return very low percentages to these poorer investors, who put billions of their hard earned money into them, most getting nothing in return.

Fundamentally, government lotteries compete with ICOs. The government lotteries are ultimately “binary option” investments because you either win, or lose. Private sector binary options losses in the UK were ~£60m in 2017, less than 3% losses on at least ~£2 billion in trading volume. Losses for the UK’s National Lottery were just under £3 billion.

ICOs are not binary options, except maybe in the long term. ICO tokens can increase in value, and you can cash out, subject to trading volume, at any time, or “hodl” for the long term and take your chances. Tokens sold in ICOs can rise from the dead, like Amazon stock after the dot-com bust, and perhaps become amongst the most successful of investments.

In 2017, ICOs produced a gain across all investors of 1320%. That’s lower now, because of ~50% drop, so we can perhaps think of that gain as ~600%, as an off-the-cuff calculation.

Clearly, ICOs are annihilating lotteries as high-risk investments. It is interesting to note that there was a significant drop in National lottery participation in 2017, while there was a very big increase in ICO participation.

Perhaps this is one reason for government calls to regulate ICOs.

Cryptocurrency advocates (and less wealthy investors) ought to start a movement to regulate government lotteries.