What is Greater Fool Theory?

The greater fool theory proposes that new traders or investors in a market always buy overvalued assets sold off by other traders or investors. Professor Burton Malkiel first discussed this theory; he said that the effect of human bias on investment, made worse by herd behaviors, ensures that an investor can still make money from an overvalued asset by selling to a “greater fool.” A greater fool is an investor that enters the market late, buying assets because of the rising market price without considering the market value and ease of selling off the asset later.

Where investors choose to buy overvalued assets as a result of the markt hype or performance, they may end up becoming the greater fool investors. In decentralized finance, such investors are commonly said to have provided “exit liquidity” for smarter investors who sold at a high price and made profits.

Example of Greater Fools Theory in the Crypto Market

There are many examples of cryptocurrency investors and projects that best explain the greater fools theory, but Dogecoin and Shiba Inu are perhaps the best examples. Dogecoin and Shiba Inu are the two leading memecoins that have performed tremendously in the past. Dogecoin’s price moved 14000% in 2021, setting off a mad scramble by greater fools who bought at the high price but then, the price fell.

Greater fools theory also applies to scam projects such as rugpulls where the token creators collect all funds in a single wallet and make away with them. AfriCrypt, OneCoin, and more recently, Squid Token are examples of such rugpulls that qualify as greater fools.

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