As the saying goes, “You don’t have to outrun the bear to escape.” You just have to run faster than the man next to you. In the world of economics, this is known as the biggest fool theory, which states that it doesn’t matter whether an asset is risky, has a huge 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 rate and in a way that seems unsustainable. Market bubbles are caused by over-optimistic (or hopelessly naive) investors subscribing to improbable forecasts of the future. It’s about fools buying insane products at insane prices. But where there are fools, there are deals to be made. Here are just two examples of how the biggest fool theory works in the real world.
art. In 2021, a Mark Rothko piece, #7, sold for $82.5 million. I’m not denying that Rothko is good at his job, and I’m not saying that 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 many people make a lot of money trade into art. The idea is that no matter how bloated or overpriced you or I find a work of art, all that matters is that someone else buys it for more. The trick to selling art is not so much finding good art, but finding “dumb” ones who want it to see as good art (and buy it as such).
real estate. Cheap credit, lax credit laws and subprime mortgages caused the 2007-2008 financial crash. But one of the pins that burst the bubble was when the market ran out of fools. Dans les années qui ont précédé le crash, il y avait une croyance répandue selon laquelle les valeurs immobilières augmentaient toujours, the sorte que les banquiers et les spéculateurs vendaient leurs prêts (louches) les lucrats revientres banques dans revientres banquets often. As assets began to deteriorate, a few banks – the last fools left standing – went bankrupt, and the rest is history.
Is cryptocurrency for fools?
Speaking to TechCrunch, Bill Gates said 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 Gates, Buffett and several economists are making is that crypto offers no “real” value. Cryptocurrency is thus just a bubble in which people try to mislead each other. It is nothing more than a trick to make money in order to buy and sell more expensive. When people become aware of this, the crypto will crash. But how fair is this cryptocurrency analysis?
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While it is true that there are few “real” uses for cryptocurrency, it is far too early to say for sure whether Bitcoin or other digital currencies to be practically useless. Today, people use cryptography to transfer money across borders and settle large transactions. At least a few major retailers will accept Bitcoin as they would certify currencies. Writing for Forbes, Matt Hougan likens Bitcoin to oil in the 1850s. At the time, oil was only used for lamps and machine lubrication. Of course, with combustion engines and technological advancements, petroleum has become one of the world’s most valuable raw materials. Perhaps something similar is happening with crypto.
And if you think about it, the biggest stupid theory is how many markets work. Prices and value are not always determined by practical factors such as usability. They are determined by supply and demand. Like humans think a Rothko is worth $80 million, so that’s worth it. If people are willing to pay a price, then that price determines the value (at least in economic terms). The problem, of course, is that people are notoriously fickle. What we find valuable today, we find worthless tomorrow. Therefore, crypto is no more of a “bubble” than any other often inflated market, such as art or jewelry.
The jury is out
The issue of digital currencies is still largely unanswered. While Gates and Buffet are right in suggesting it isn’t, Normal an investment like that found in other markets, it is also not fair to say that it is completely unique. Anyway, the biggest fool theory is a handy way to look at it. Whatever you do in life, just try not to be the biggest jerk in the room.