Cryptocurrency and the &quotgreater fool&quot theory of economics – Big Think

As the adage goes, “you don’t have to outrun the bear to get away.” you just have to run faster than the guy next to you.” In the world of economics, this is known as the biggest fool theory, which posits that it doesn’t matter whether an asset is risky, vastly inflated in price, or worthless. the only thing that matters is that someone else is willing to buy it from you for more than you bought it for. think: baby hats.

fools, everywhere

The big fool theory generally applies to a market bubble. This is where a product or asset sees a huge increase in value, usually with a speed and in a way that seems unsustainable. market bubbles are caused by overly optimistic (or hopelessly naive) investors who subscribe to unlikely projections about the future. it’s about suckers buying dumb products at dumb prices. but where there are fools, there is business to be done. these are just two examples of how the big fool theory works in the real world.

Reading: Greater fool theory bitcoin

art. In 2021, a mark rothko piece, no. 7, sold for $82.5 million. i’m not denying that rothko is good at his work, and i’m not saying that modern art is untalented or bad (on the contrary), but that’s a lot of money for oil on canvas. Some people buy art because they love it, and some people buy it to launder money, but a lot of people make a lot of money trading art. the idea is that no matter how inflated or impossibly expensive you or I think a work of art is, all that matters is that someone else buys it for more. the trick to the art trade is not so much to find good art, but to find “fools” willing to see it as good art (and buy it as such).

See also: Crypto Dividends: Everything You Need to Know in 2022 – Haru

real estate. Cheap credit, lax lending laws, and subprime mortgages caused the financial crisis of 2007-08. but one of the pins that burst the bubble was when the market ran out of chumps. In the years before the crash, it was widely believed that real estate values ​​always rose, so bankers and speculators sold their (dodgy) loans to other banks for a profit, who often sold them back. when assets began to deteriorate, some banks (the last suckers standing) went bankrupt and the rest is history.

Are cryptocurrencies for suckers?

In a conversation with techcrunch, bill gates said that nfts (non-fungible tokens) and digital currencies were “100% based on the biggest fool theory”. Or, as Warren Buffett put it in 2020, “Cryptocurrencies are basically worthless. you can’t do anything with it except sell it to someone else.”

the point of gates, buffett and various economists is that cryptocurrencies do not offer value in the “real world”. therefore, cryptocurrency is simply a bubble in which people try to cheat each other. it is nothing more than a scheme to make money to buy and sell higher. when people realize this fact, cryptocurrencies will crash. but how fair is this analysis of cryptocurrencies?

See also: How To Transfer Crypto From To Webull And Vice Versa?

While it is true that there are few “real life” applications for cryptocurrencies, it is too early to say for sure whether bitcoin or other digital currencies are virtually worthless. Today, people use crypto to move money across borders and to settle large transactions. at least some major retailers will accept bitcoin as they would a fiat currency. Matt Hogan, writing for Forbes, compares Bitcoin to oil in the 1850s. Back then, the oil was used only for lamps and machine lubrication. Of course, with combustion engines and technological advances, oil became one of the most valuable commodities in the world. perhaps something similar will happen with crypto.

and when you think about it, the dumbest theory is how many markets work. prices and value are not always determined by practical factors such as utility. They are set by supply and demand. if people think a rothko is worth $80 million, then that is his value. if people are willing to pay a price, then that price determines value (at least in economic terms). The problem, of course, is that humans are notoriously fickle. what we think today is valuable, tomorrow we think worthless. therefore, cryptocurrencies are no more of a “bubble” than any other often inflated market, such as art or jewelry.

the jury is out

The question about digital currency remains unanswered. while the doors and buffet may suggest that it’s not as standard an investment as those found in other markets, it’s also not fair to say that it’s completely unique. regardless, the big fool theory is a useful way of looking at things. whatever you do in life, just try not to be the biggest fool in the room.

See also: Six months in, El Salvadors bitcoin gamble is crumbling – Rest of World

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