In finance, the greater fool theory is the belief that one can make money by buying assets at a price that is already too high, on the expectation that the price will rise further.
The theory is named after British economist John Maynard Keynes, who said in his book The General Theory of Employment, Interest and Money (1936): “The market can stay irrational longer than you can stay solvent.”
Keynes was referring to the stock market, but the greater fool theory can be applied to any asset, including Bitcoin.
Bitcoin has been on a tear this year, with the price of a single coin rising from around $1,000 at the start of 2017 to more than $17,000 today.
This incredible run has been driven by a combination of factors, including increasing demand from Asia, hype surrounding the launch of Bitcoin futures contracts, and most importantly, a lot of new investors buying Bitcoin in hopes of making a quick profit.
This last group is where the greater fool theory comes in. These investors are buying Bitcoin not because they believe in the long-term potential of the technology, but because they think they can sell it to someone else for even more money in the future.
This type of investing is extremely risky, and often ends badly for those who get involved. Sooner or later, there will be no one left to buy Bitcoin at a higher price, and the price will crash back down to reality.
Those who bought at the top will be left holding the bag, while those who got out in time will be laughing all the way to the bank.
So is Bitcoin a bubble that’s about to pop? It’s certainly possible. But even if it is, there will always be another bubble somewhere else for investors to chase.