In short, the greater fool theory regarding investments refers to the the irrational buying of a product at foolishly expensive prices hoping that there will be another fool, a greater fool, looking to pay you more than you did so that that fool can find some greater fool to pay him more than what he paid you. Still following me? Good. This happened during the 17th century tulip mania. This happened most recently during the housing boom and sudden collapse. Remember how we all seemed to know of someone who was eager to flip houses for a profit, paying exorbitant prices for homes that they couldn’t afford to live in but hoped someone else would buy it off of them at a higher price. Those are prime examples of the greater fool.
Bitcoin is NOT bound by that theory. For a very simple reason: unlike tulips or houses, you CAN buy FRACTIONS of bitcoin. The current price of bitcoin as of this blogpost is $9975. According to the greater fool theory, that means I would need to buy it at $9975 and hope there’s a greater fool willing to pay me $10,200 so I can make a quick profit of $225. With numbers such as that, it seems like the theory makes sense and that at any moment, we will run out of fools willing to pay $10,500, or $11,000… or $20,000.
But is that really the case? My answer is a loud and resounding NO!
Because we can purchase bitcoin at any amount, whether it’s $1, $10, $50, $100, $500, or the full per coin price currently at $9950…. we don’t need greater and greater fools willing to pay bigger and bigger amounts. I can buy $10 of bitcoin fractions … and there can easily be another buyer willing to pay $20 for my fractions of bitcoin. It only costs that buyer $20. Since global adoption of bitcoin is at 0.01% of the world population,it will be a VERY VERY long time before we run out of people willing to pay a little extra for the small fractions of bitcoin from sellers who own fractions of bitcoin.
In the case of flipping houses during the real estate boom, you couldn’t buy fractions of a house. You needed to pay the full amount: $200,00…. then $250,000… then $500,000…. and so on and so forth, hoping there’s a greater fool willing to pay those lump sums all in full. When dealing with those massive amounts of money per transaction, of course the market will eventually run out of wealthy fools willing to pay ever larger amounts. But when the product, like bitcoin, is broken into fractions, the number of “fools” is close to infinite, bound only by the size of global population. And as mentioned before, bitcoin adoption is currently at 0.01% of the worlds population. Just imagine where the price will be when more and more people get in on bitcoin via fraction sized purchases. Since last week, I have heard and known of many friends and acquaintances who have got in on bitcoin but with only $100 amounts. That’s why bitcoin is NOT bound by the greater fool theory.