Bitcoin and the Greater fool theory

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Warnings about bitcoins and other cryptocurrencies are coming from all directions. Concerns about the security of the cryptocurrency have continued to shadow it. Last year, almost 120,000 bitcoin worth around $78m (£58m)were stolen from Hong Kong-based Bitfinex, one of the most popular cryptocurrency exchanges, which resulted in a 20% drop in the value of the currency at the time.

Moreover, there is also a high risk of fraud. There is still a good deal of misinformation and lack of clarity regarding bitcoin trading, and fraudsters have taken advantage of this to launch Ponzi schemes, which promise ‘guaranteed high returns’.

Aside from the operational issues of trading in cryptocurrencies as well as the growing scam companies, electronic payments expert Dave Birch has said in the past that “one doesn’t invest in bitcoin, one gambles on bitcoin”. Those working in the area advise anyone planning on buying the currency to only invest as much as they are prepared to lose.

But why we should not think Bitcoin as an investment rather than as a long-term gambling?

Bitcoin does not have real value and it depends solely on the Greater fool theory. The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. In other words, one may pay a price that seems “foolishly” high because one may rationally have the expectation that the item can be resold to a “greater fool” later.

References:

https://economictimes.indiatimes.com/wealth/invest/7-reasons-why-you-should-not-invest-in-bitcoins-cryptocurrencies/articleshow/60891341.cms

https://www.theguardian.com/technology/2017/oct/12/harry-redknapp-cryptocurrency-electroneum-twitter

https://en.wikipedia.org/wiki/Tulip_mania

https://en.wikipedia.org/wiki/Greater_fool_theory

https://www.theguardian.com/money/2017/oct/01/will-bitcoin-ever-be-safe-investment-gamble

 

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