What is the “Big Fool” theory in Bitcoin

Bitcoin is no longer the concern of a few nerds in the computer world. This topic has become public knowledge. In daily newspapers, on television, in a taxi, in a barber shop: cryptocurrencies are being talked about everywhere these days.

The historical development of the Bitcoin price shows all the classic signs of a speculative bubble.

Probably the most typical argument is “this time is different”: enthusiasts put forward all sorts of reasons why the development of events this time is unique, and cannot be compared with previous speculative bubbles.

The “Big Fool” theory tells us that there will always be a bigger fool willing to pay a higher price for an overvalued asset. This happens until eventually there is no one left who is willing to pay for the asset, and the latter is considered the biggest fool of all. It’s like playing in a wheelchair, where when the music stops, there’s always someone who loses

In the investment world, this is due to ignoring everything that has to do with the intrinsic value of the asset in which you invest your money.

An aspect that cryptocurrencies like Bitcoin lack. But today we will see that this does not mean that BTC or ETH suffer from this theory, which we will talk about later.

How the “Big Fool Theory” works

In this case, the investor buys an asset, for example, stocks, bonds or cryptocurrency, without doubting its quality.

The reason for this lies in the theory that in the future there will be someone willing to pay a higher price than the one paid by the first investor, which creates a vicious circle of demand.

However, eventually the bubble bursts, which leads to a rapid drop in the price of the asset. At this point, the person who owns the asset should not sell it at a lower price, paying for the profits of the others and becoming a big fool.

This theory can be applied to the cryptocurrency market, as well as to the stock market, real estate and any market where assets are bought and sold.

The importance of intrinsic value

The reason why an investor loses on these assets is because of their quality. That’s why when you invest, you need to do research, DYOR, including valuation models.

Which is difficult in the cryptocurrency market, because today there is no way to evaluate cryptocurrencies, although such attempts have been made.

The intrinsic value of a stock is the calculation of the total value of this company, regardless of what price the market considers.

For example, earnings, profits and future cash flows are used to determine the actual value of stocks and thus determine whether the market believes they are worth more or less.

This is impossible to calculate for cryptocurrencies, because cryptocurrencies have no income, expenses or anything else that would allow us to determine the correct value. Thus, we cannot know whether the market is overpaying or underpaying for it.

That’s why intrinsic value makes sense for stocks or bonds, but not for cryptocurrencies. But this does not mean that they are not covered by the theory.

Examples of this theory

For a better understanding of the theory, we can cite two examples that have become an important part of world financial history.

• The 2008 crisis

When the value of assets becomes inflated due to the lack of consideration of intrinsic value, this leads to speculative bubbles, which eventually burst and give rise to crises.

For example, the 2008 crisis is one of them. When people took out loans from the bank to buy houses, not because they wanted to live in them, and without having the necessary guarantees, but in order to sell them at a higher price in the future. It worked for a few years, but then it stopped.

When more and more people saw that this growth was meaningless, that there was no intrinsic value, everything began to collapse. The result was non-repayment of loans and lack of funds from banks, which fell into an unprecedented crisis.

• Stock Market

In the stock market, we can also see the application of this theory, especially when investors put their money on companies that cannot justify their value.

They get carried away with the hype that in the near future, basically in the near future, they will be able to sell her shares at a higher price and make a bigger profit.

But if a company has no intrinsic value and cannot provide higher returns, then its value is not justified, which makes end buyers big fools, because they cannot find anyone who is willing to pay more than them.

Bitcoin and the “Big Fool Theory”

According to Bill Gates, Bitcoin and cryptocurrencies are part of this theory because:

“As an asset class, it is 100% based on the “bigger fool” theory: someone will pay more for it than me.”

Theoretically, Bitcoin can be considered an asset that makes a profit because someone pays more for it than we do.

It produces nothing and therefore has no intrinsic value that would allow us to evaluate it. We cannot say that it costs $30,000 or $10,000, and act accordingly depending on the market price.

Thus, BTC, and other cryptocurrencies, operate according to the principles of the Big Fool theory, where the cycle will continue until it reaches new highs and eventually collapses.

But the reality is that Bitcoin is generally misunderstood. It’s not an asset like stocks or bonds, it’s a currency, or at least it’s trying to be one.

No one puts forward this theory in relation to other assets, such as the dollar or the euro, which, on closer examination, are not secured by anything. They still perform a certain function, and that’s not why we can say that this is a Ponzi.

If we consider Bitcoin as what it aspires to become (perhaps, according to some, today it has not yet reached a sufficient level to be called a currency or a valuable haven, but in the future it may become one), then this theory is not applicable as such.

Yes, it is true that many people seek to get this benefit by finding someone who is willing to pay more in the future, but not everyone acts on this premise.

Conclusion

The Big Fool theory is a theory that tells us that we can make money by buying an asset, which will then be sold to someone who is willing to pay more for it. In such schemes, eventually, the market will run out of people willing to invest more money, and the price will collapse.

We can say that Bitcoin and cryptocurrencies belong to this theory, but the reality is that it is not an asset comparable to stocks, bonds or real estate, so it does not necessarily work that way.