Bitcoin & The Greater Fool Theory – Consumer Behavior

A Bitcoin exchange in South Korea went out of business in December after it was hacked by cyber thieves that stole roughly 20% of it’s clients holdings, validating that cyber currency exchanges are still extremely susceptible to losses. Unlike a bond, stock or real estate, a cryptocurrency offers no intrinsic value, such as cash flow and earnings. Instead, the value is solely based on what the next buyer is willing to pay leading to speculation, also known as the greater fool theory.

The greater fool theory states that the price of an item is determined by unreasonable expectations and ideals about that item. As speculation inflates prices, sellers profit as there will always be a bigger fool willing to pay a higher price.

Many believe that the price of Bitcoin in the final weeks of 2017 exemplified behavior relative to the greater fool theory. Volatility in December alone was considered irrational and speculative in nature, as the cyber currency value skyrocketed over 40% in early December, then tumbled over 30% later in the month.

 

 

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