As the saying goes, “You don’t have to outrun the bear to escape.” 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 if an asset is risky, has a massively inflated price, or is worthless. All that matters is that someone else is ready to buy it from you for more than you bought it. Think: Beanie Babies.
The biggest fool theory is usually applied to a market bubble. This is where a product or asset sees its value increase dramatically, usually at a speed and in a way that seems unsustainable. Market bubbles are caused by overly optimistic (or hopelessly naive) investors who subscribe to improbable projections about the future. It’s about fools buying insane products at insane prices. But where there are fools, there are deals to be had. Here are just two examples of how the biggest fool theory works in the real world.
Art. In 2021, a piece by Mark Rothko, #7, sold for $82.5 million. I’m not denying that Rothko is good at his work, and I’m not saying modern art is talentless or bad (on the contrary), but that’s a lot of money for oil on canvas. Some people buy art because they like it, and others do it to launder money – but a lot of people make a lot of money trade in art. The idea is that however bloated or overpriced you or I might think a work of art is, all that matters is that someone else will buy it for more. The trick to selling art is not so much finding good art, but finding “dumbs” willing to see as good art (and buy it as such).
Immovable. Cheap credit, lax lending laws and subprime mortgages caused the financial crash of 2007-2008. But one of the pins that burst the bubble was when the market ran out of fools. In the years leading up to the crash, there was a widespread belief that real estate values were always rising, so bankers and speculators sold their (shady) loans to other banks for profit, who resold them. often. When assets started to deteriorate, a few banks – the last fools standing – went bankrupt, and the rest is history.
Is cryptocurrency for fools?
In a conversation with TechCrunch, Bill Gates said that NFTs (non-fungible tokens) and digital currencies are “100% based on dumber 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 that Gates, Buffett, and various economists are making is that crypto offers no “real” value. So, cryptocurrency is simply a bubble in which people try to trick each other. It is nothing more than a ploy to make money in order to buy and sell more expensively. When people become aware of this fact, the crypto will crash. But, how fair is this cryptocurrency analysis?
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While it is true that there are few “real” applications for cryptocurrency, it is far too early to say for sure whether Bitcoin or other digital currencies are practically useless. Today, people use cryptography to transfer money across borders and to settle large transactions. At least a few major retailers will accept Bitcoin as they would fiat currency. Matt Hougan, writing for Forbes, compares Bitcoin to oil in the 1850s. Back then, oil was only used for lamps and lubricating machinery. Of course, with combustion engines and advances in technology, petroleum has become one of the world’s most valuable commodities. Maybe something similar will happen with crypto.
And when you think about it, the biggest dumb theory is how many markets work. Prices and value are not always determined by practical factors like utility. They are set by supply and demand. If people think a Rothko is worth $80 million, so that’s what it’s worth. If people are willing to pay a price, then that price determines value (at least in economic terms). Of course, the problem is that humans are notoriously fickle. What we think today is valuable, tomorrow we think it worthless. Therefore, crypto is no more a “bubble” than any other often inflated market, such as art or jewelry.
The jury is out
The question of digital currency is still largely unanswered. Although Gates and Buffet may be right to suggest that it is not as Ordinary an investment like those found in other markets, it is also not fair to say that it is entirely unique. Either way, the biggest fool theory is a useful way to look at it. Whatever you do in life, just try not to be the biggest jerk in the room.
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Cryptocurrency And The “Biggest Fool” Economic Theory
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