Real-Estate, Art & NFT Bubbles Follow “Greater Fool” Theory | How Bill Gates & Warren Buffet Predicted The Crypto Crash

3 min read

The world has seen significantly worse economic lapses in the past, from 2008’s Real estate collapse to the dot-com bubble in the 90s. The crypto market crash could be the next major economic crisis. In such situations, experts can’t help but draw parallels with past market crashes. There are many similarities, but it is far too early to arrive at a conclusion. In such times, some recall Bill Gates’ comment about the crypto and NFT market being based on the greater fool theory.
 
“You don’t have to run faster than the bear to get away,” goes the adage. “You just have to run faster than the person next to you.” In the world of economics, this is known as the greater fool theory, which states that it doesn’t matter if an asset is risky, inflated, or worthless. The only thing that matters is that someone else is willing to buy it from you for more than you paid for it. In the past, it has typically been applied to “bubble markets” like art or housing, but more recently it has been applied to cryptocurrencies. It is too early to say whether cryptocurrencies are of no use or inherently overvalued. 

2007-08 Crisis Used Explains How the Crypto Market Bubble Burst in 2022

Usually, the greater fool theory is applied to market bubbles. When a product or asset sees a huge increase in value, usually rapidly and in a way that does not seem sustainable. Typically, market bubbles are caused by overly optimistic (or hopelessly naive) investors who sign up for unlikely projections about the future. Fools buy foolish products at foolish prices. However, where there are fools, there is business to be done. Here are two examples of how the greater fool theory works in real life.

Art. Mark Rothko’s No.7 sold for $82.5 million in 2021. That’s a lot of money for oil on canvas, and I’m not saying Rothko is a bad artist or a bad painter (on the contrary). A lot of people make a lot of money trading in art – some buy it because they love it, others do it to launder money. All that matters is that someone else will pay more for a work of art no matter how inflated or eye-wateringly expensive you or I think it is. Buying and selling art is not so much about finding good art as it is about finding fools who will see it as such (and buy it as such).

Same with real estate. The financial crash of 2007-08 was caused by cheap credit, lax lending laws, and subprime mortgages. One of the pins that burst the bubble was when the market ran out of fools. It was widely believed before the crash that real estate values always increased, so bankers and speculators sold their (dodgy) loans to other banks for a profit, who then sold them again. When the assets began to go bad, a few banks – the last fools standing – went bankrupt, and the rest is history.

Why Are Gates & Buffet Against Cryptocurrencies & NFTs

Bill Gates told TechCrunch that NFTs (non-fungible tokens) and digital currencies were “100 percent based on greater fool theory.” Or, as Warren Buffett said in 2020, “Cryptocurrencies basically have no value.” All you can do is sell it.

Gates, Buffett, and various economists claim that cryptocurrency has no “real-world” value. Therefore, cryptocurrency is simply a bubble in which people try to out-fool each other. Nothing more than a money-making scheme to buy and sell higher. Crypto will collapse when people realize this. Is this a fair analysis of cryptocurrency?

Via this site Cryptocurrency and the “greater fool” theory of economics – Big Think

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