‘Greater fool’ theory drives cryptocurrency speculation
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I vividly recall a car journey I made between Plymouth and Bristol more than twenty years ago, driving along while listening to a radio call-in. The show’s presenter was hosting a discussion about the stock market and the ease (the ease!) with which people appeared to be making money from it.
There was no shortage of callers delighted with themselves for ‘investing’ a few hundred pounds (or less) and making 10-15% within a month as the dotcom bubble grew large enough to accommodate everyone’s cash and provide them with a handsome, short-term profit. We all know how that ended.
Not long after the journey to Bristol, a good friend invited me around to introduce me to spread betting. After he explained how it worked, we were ready to open an account so I handed him my debit card and asked him to complete the online form, simultaneously excusing myself for a comfort break.
I returned five minutes later. Dave said he’d opened the account, whereupon he spotted an opportunity to ‘buy’ shares in a company which had immediately soared in value, so he duly closed the position and banked the £340 profit into my newly-opened spread betting account. It remains the most valuable visit to the WC I’ve ever made*. That’s a true dotcom-era story.
Here’s another. When property prices went ballistic in the late 1980s (in 1988, UK property prices rose, on average, by 25%), it seemed that every other person you met in the pub or at a party (remember them?) described themselves as a ‘property developer’. Good luck to them, I thought, why not take advantage of a rising market?
However, after being introduced to a guy who didn’t realise he needed planning permission to convert a building he was buying into flats, I concluded that, as far as property was concerned, this would be a good time to either sit tight or sell; I ended up doing a bit of both.
Bandwagon-jumping, especially where apparently easy money is involved, invariably offers first-rate examples of humans showing their Icarus tendencies.
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You will recall that in Greek mythology, Icarus and his father, Daedalus, were imprisoned on an island by King Minos. To escape, Daedalus crafted two sets of wings made of wax and feathers.
He warned his son not to fly too close to the sun, as the wax would melt, nor fly too low because the feathers could get wet in the sea. Icarus ignored his father’s advice. So intoxicated was the young man by the experience of flight that he continued flying higher and higher and, as the wax melted, he fell into the sea and drowned.
It’s with Icarus’s tragic tale in mind that we may urge family or friends not to ‘fly too close to the sun’, although as the recipients of such advice are often fuelled by a combination of ambition and excitement, they become reckless, place excessive confidence in their own judgement and ultimately ignore the cost or damaging consequences of their actions.
Which brings me on to the current cryptocurrency craze, our present-day version of last century’s dotcom boom.
The latter came to a juddering halt when it became apparent that far too many companies had added the .com suffix to their corporate name in an attempt to make them appear progressive and cutting-edge. Unfortunately, many were little more than empty shells; their share prices rose thanks mainly to the ‘greater fool’ theory.
The greater fool theory (GFT) states that it is possible to make a profit by buying shares (or any other assets), irrespective of their true value, by selling them for a profit at a later date. This is because there will always be someone, namely a bigger or greater fool, prepared to pay a higher price for them.
Cryptocurrency trading appears to operate on a similar basis and, because no-one wants to admit that the GFT is driving the market, many smaller players, presently buying tiny percentage shares of cryptocurrencies, refuse to acknowledge that this market-driven merry-go-round could end in tears.
Listening to people boast how easy it was to make money from the stock market all those years ago reminded me of the old saying: ‘there’s never a bad time to bank a profit’. People caught up in the GFT-driven cryptocurrency craze could do themselves a favour by listening to the same shrewd advice.
*My spread-betting days were short-lived after I got my fingers badly burnt trying to ‘play’ the US Nasdaq stock market. The memory of that easy £340 profit disappeared in the blink of an eye.
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