The Greater Fool Theory & Cryptocurrencies
I recently came across a video of the infamous Jordan Belfort (aka “the Wolf of Wallstreet”). I knew he is a cryptocurrency FUDster but decided to see what he had to say in relations to the Greater Fool Theory.
Essentially Belfort claims cryptocurrency “is all based on the Great Fools Theory. I know this better than anyone in the world. I’m not proud of that, but I do.”
“There’s no fundamental value, it’s all based on the next guy and the next guy… Get out if you don’t want to lose all of your money because … you’re not going to be able to sell on the way down, there will be no liquidity.”
What is the “Greater Fool Theory” and is it applicable to cryptocurrencies?
What is the Greater Fool Theory?
Belfort believes price surges in cryptocurrencies are only due to a belief by investors that there will continue to be a ‘greater fool’ who they can sell their assets to at a higher price. This is the general idea of the Greater Fool Theory.
According to Investopedia, “an investor will purchase questionably priced securities without any regard to their quality. If the theory holds, the investor will still be able to quickly sell them off to another “greater fool,” who could also be hoping to flip them quickly. Unfortunately, speculative bubbles burst eventually, leading to a rapid depreciation in share prices.”
Does the Greater Fool Theory Apply to Cryptocurrencies?
Perhaps – Bitcoin experienced a meteoric rise in 2017 starting the year at ~$1,000 and ending at ~$20,000. As Bitcoin-mania peaked people were certainly acting foolish. Some took out second mortgages to invest their life savings while Bitcoin was at ~$20,000 purely out of the fear of missing out.
From a micro perspective this certainaly looks like a foolish move. From a macro perspective, however, it may not be so bad. If Bitcoin ascends to prices such as Tim Drapper or John McAfee have predicted in a few years ($250,000 – $1,000,000 per BTC) then the question becomes who actually is the fool?
The masses got caught up in a “mania” frenzy but that doesn’t mean Bitcoin and cryptocurrencies are only for fools. Just as the price of gold or a collectible comic books – the price is only what someone else is willing to pay for it. As Bitcoin grows in popularity and continues to be used by the masses, the value of each BTC must go up. The only way legitimate cryptocurrencies will be deemed as “for fools” is if the blockchain technology that it is based on fails.
For now, Belfort is basing the fact that cryptocurrencies are destined to be valueless. Unless he can predict how the rest of this chart below will look in the coming years, we’ll have to wait to find out. But if cryptocurrencies are here to stay, the question will become who really was the fool?