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Memories of the 28th Century

Greater Fool

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I was looking at business stories in Google Business, and I was amazed to see several about Bitcoin increasing in value. While Extraordinary_Popular_Delusions and the Madness of Crowds is the classic study of people getting carried away in investments. There have been plenty of more recent example. There have been several stock bubbles in the last few decades, and some people regard the U/S/ housing market as having been a bubble, e=even though it was government policy to increase the value of residential real estate. Then there was the “” bubble of the 1990's, and the S$L crash of 2008 is usually considered a bubble. And one of the linked articles mentions the bull market in U.S. stock in the 1920's to have been a bubble. In effect, it was, but there were other reasons why it collapsed, including the war between the U.S.A. and the UK that was fought with tariffs, but the U.S. won (that's another story).

Determining the value of anything can be difficult, but in pricing liquid investments requires consideration of the greater fool theory. That is that something is worth as much as a greater fool will pay you for it. The Bitcoin enthusiasts talk about the value being kept honest by “blockchain”, which appears to be a restatement of the greater fool theory. It might also be said that you can't be scamming someone, if that person thinks that he is scamming you. But I think that one should consider the matter of “Fair Market Value”. The amount at which a property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.”

The trouble in bubbles is that some people are deluded into thinking that they know what something is worth; although they are mistaken. There often is conflict between FMV and the greater fool, and the result usually is that the fools lose badly. The biggest question often is : When will the crash come. Unfortunately, timing the crash is difficult; it usually is a fool's errand. But determining whether something is overvalued is relatively easy: a simple capitalization of income will show what the range of value. Unfortunately, one can only use the income approach, if there is some chance that the asset will produce income, and tulip bulbs and bitcoins do not produce value, unless one is charging a commission for dealing with them.

There are some people who think that bitcoin and similar things will eventually replace official currency, but there is no sign of that happening. Bitcoin is very much a fringe investment for people who want to avoid dealing in anything that may excite official notice, so it is used in the trading of illegal things, and that might be a valid use, but it means that the local grocery store is not likely to accept them, even though the drug dealers and pimps love them. There might be attempts to use bitcoin as the price of real estate, but that will be a problem, unless there will be regular exchange rate.

I never bought into the bubble either, and I am dubious about the real estate market; although that skepticism may decrease as result of the recent court settlement that eliminates the 6% commission rate that the National Association of Realtors has been charging, but we will have to see where that will go. But the U.S. Government has specific policies that have led to real estate continuing to attract greater fools, and sometimes they were not fools, because they gained by it.

If you want to determine the future relative value of an asset, then it is wise to use the methods that Warren Buffet has use, and he favors the dividend discount model, and that requires that a company have a dividend that has been increasing, or at worse not decreased.


  1. tailor STATELY's Avatar
    Interesting post re: bitcoin. Have heard of many failures and its volatility... haven't heard of many legitimate successes, but there must be some else it would have bust by now I guess. I think the hassle of regulation will be its ultimate demise, but who knows... they prolly have great lobbyists with deep pockets.

    Ta ! (short for tarradiddle),
  2. PeterL's Avatar
    More and greater fools have kept bitcoin going.