Microsoft co-founder and former world’s richest man, Bill Gates, says he believes cryptocurrencies and NFTs are based on the greater fool theory.
Summary
According to Bill Gates, cryptocurrencies and NFTs are based on the “greater fool theory”
He said this last month during an interview where he also revealed that investing in Bitcoin is a terrible idea because of its volatility.
The interview was also recently quoted by the Wall Street Journal, reopening the debate.
Bill Gates said he thinks cryptocurrencies and NFTs are “100%” based on the greater fool theory https://t.co/7OpnJvqHRp
— The Wall Street Journal (@WSJ) July 9, 2022
“Greater Fool Theory” states that the price of an asset goes up only if the person who owns it can sell it back to someone more foolish than him, regardless of whether the asset is overvalued or not. The price falls when no one more foolish can be found to sell it back to.
From a technical point of view, it means ignoring the fundamentals and valuations regarding an asset and buying only with the hope of finding someone willing later to buy at a higher price.
In fact, it is also, for all intents and purposes, a true speculative strategy, which can be successfully adopted if one actually manages to resell the asset quickly to someone simply willing to pay more for it.
This scenario seems to describe quite well what happens, for example, to the price of Bitcoin when giant speculative bubbles are triggered, such as the one in 2013 and 2017 or even the one in 2021.
However, what differentiates Bitcoin from many other cryptocurrencies and the market of some NFTs, is that when one of these speculative bubbles due to the “Greater Fool Theory” bursts, the price does not reset, nor does it implode.
To other cryptocurrencies, however, this has already happened, as well as perhaps to some NFTs purchased during the speculative bubble at too high a price.
Does the greater fool theory apply to bitcoin as well?
Both after the 2013 speculative bubble burst and after the 2017 bubble burst, the price of Bitcoin not only recovered but made new highs.
For example, Investopedia under Greater Fool Theory explicitly states that large institutional investors and companies such as Tesla and PayPal were also involved in BTC purchases in 2021, so much so that it is questionable to consider them fools.
They add:
“So, perhaps Bitcoin is not an example of the greater fool theory, after all.”
This reasoning applies specifically to Bitcoin and rare cases of other cryptocurrencies that now play a role in the financial markets. On the other hand, the vast majority of cryptocurrencies do not, so much so that their price since the bursting of a speculative bubble tends not to recover.
Those who do not distinguish between Bitcoin, Ethereum, and the tens of thousands of other cryptocurrencies evidently do not know the cryptocurrency markets well enough since the inconsistency of so many cryptocurrency projects is nowhere near enough to jeopardize the role that BTC already plays in global financial markets.
