Crypto Glossary

Greater Fool Theory

The greater fool theory was first discussed by professor Burton Malkiel. It suggests that there is always a “greater fool” that you can sell an overvalued asset to.

What Is the Greater Fool Theory?

The greater fool theory was first discussed by professor Burton Malkiel where he said that as an investor, you can buy stocks or other investment assets that are clearly over-valued and still make money. This stems from his observation that due to biases in human behavior, people are generally drawn to assets whose prices are increasing. He posited that the effect is worsened due to herd mentality, where stories of immediate success by others are more likely to spur others to pursue similar gains. In short, the theory suggests that there is always a “greater fool” that you can sell the asset to.

Greater Fool Theory Example

Understanding this theory in the context of the digital assets market, we could see this in the rise of meme coins. So two of the most popular meme coins are probably Doge and Shiba Inu, where the existence of these coins has created multi-millionaires and billionaires. As more stories of people becoming millionaires come out, it attracts “greater fools” who irrationally believe that they can be the next millionaire. In some cases, these meme coins can even be outright scams, such as the “Squid Game” coin based on the popular South Korean Netflix drama.

Author: Gunnar Jaerv is the chief operating officer of First Digital Trust — Hong Kong’s technology-driven financial institution powering the digital asset industry and servicing financial technology innovators. Prior to joining First Digital Trust, Gunnar founded several tech startups, including Hong Kong-based Peak Digital and Elements Global Enterprises in Singapore.

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