The Greater Fool Theory
“Who’s the more foolish? The fool or the fool who follows him?” – Obi-Wan Kenobi.
Investors with any knowledge of the past few decades should understand market bubbles. Market bubbles refer to dramatic increases in the price of assets over their realistic and fundamental value. For instance, the housing bubble of the early 2000s greatly contributed to the Great Recession. Just a decade or so before, the Dot Com bubble’s collapse triggered a previous recession.
The Greater Fool Theory describes an essential component in market bubbles. As a market bubble plays out, investors can still make money even with overvalued assets if they can purchase and sell while the prices increase. These sellers need buyers, and in the case of inflated assets, that’s where the greater fools make their appearance.
What Happens When the Crypto Market Bubble Pops?
Buoyed by what Investopedia calls irrational optimism, new investors enter the market until something happens that finally sours people’s perception of the market. Finally, the bubble pops when the market runs out of greater fools. The last greater fools in line become bagholders or market losers. And right up until the end, promoters on social networks, video channels, or in-person will confidently call the doubters full of FUD, weak hands, and other disparaging sentiments.
Most important, Bitcoin and other digital assets get used as prime examples of the greater fool theory in action. For instance:
- Though people argue the topic, digital assets often lack intrinsic value beyond the platforms that support them.
- Sometimes, the blockchain consumes a massive amount of energy, and it also exists only as lines of code or digital blocks in cyberspace.
- Meanwhile, by design, no central authority will step in to pursue those who led the lambs to slaughter.
We Don’t Actually Hate Cryptocurrency and Blockchain
As they say, hate the sin but love the sinner. In some cases, as with underdeveloped economies, cryptocurrency can assist people in a way that weak government currencies cannot. On the other hand, that might say more about the poor local economy than the merits of Bitcoin.