Greater fool theory Meaning

The Greater Fool Theory is an economic concept which suggests that the price of an asset is determined not by its "Intrinsic Value" (its earnings or utility), but by the "Beliefs and Expectations" of market participants. According to this theory, you can make money on an "Overvalued" asset as long as you can find a "Greater Fool" who is willing to buy it from you at an even higher price.

This theory is often used to explain "Speculative Bubbles" and "Manic" market cycles.In the "Speculative" corners of the digital asset market-such as certain "Meme Coins" or "PFP NFTs"-the Greater Fool Theory is often the "Primary Driver" of price. Buyers know the asset has no "Real World Revenue," but they buy it because they see "Momentum" and believe they can "Flip" it to someone else for a 2X profit in 24 hours.

The cycle continues until there are "No More Fools" left to buy, at which point the price "Craters," leaving the "Last Fool" holding a worthless "Bag."The theory highlights the "Psychological" nature of "Valuation." In a "Bull Market," everyone feels like a "Genius" because the "Greater Fool" is always present. In a "Bear Market," the "Greater Fool" disappears, and the market is forced to return to "Fundamental Analysis." This is the "Minsky Moment"-the point where "Speculative Debt" collapses and "Reality" sets in.

It is a "Zero-Sum Game" of "Timing" and "Social Sentiment."Critics of the industry often use the Greater Fool Theory to dismiss all "Digital Assets" as "Ponzi Schemes." However, this ignores the "Utility-Based" valuation of protocols that generate "Fees" or provide "Services" (like Ethereum or Aave). The Greater Fool Theory applies to "Purely Speculative" assets, but it fails to explain assets that have "Product-Market Fit" and "Revenue." The key for an investor is to know which type of asset they are holding.Ultimately, the Greater Fool Theory is a "Warning" about "Market Mania." It reminds us that "Price" and "Value" are not the same thing.

While "Flipping" to a "Greater Fool" can be highly profitable in the short term, it is a high-risk strategy that relies on "Market Psychology" rather than "Economic Reality." In the long run, the "Fools" eventually run out, and only those holding assets with "Real Utility" are left standing.