Greater Fool Theory is a simple yet powerful idea in the investment world: you can profit by buying an overpriced asset – if someone else is willing to buy it from you at an even higher price. In this case, you’re a fool, but an even bigger fool will come along.
It doesn’t matter whether the asset has no intrinsic value or is artificially hyped. As long as there are buyers who believe the market is rising and prices will increase, people will continue to profit. But eventually, this chain breaks. The “fools” run out, and the person left holding the overvalued asset at the end bears all the losses.
In startup investments, this theory is more prevalent than expected. Sometimes investors pour millions of dollars into startups that don’t have a working product, revenue, or even a complete team. Why? Because they hope the next investor will pay more than they did. Here, the focus is on timing rather than value.
We saw this in the largest startup bubbles in recent history. For example, WeWork – although this company was simply an office rental enterprise generating no profit, its valuation reached $47 billion. Nevertheless, renowned investors continued to pour money into it one after another. They believed not in WeWork’s actual value, but in the hope that someone would later buy their stake at an even higher price.
Another example is the NFT craze of 2021. People bought digital images for hundreds of thousands of dollars. This wasn’t because they were useful or rare, but because there was a belief that prices would continually rise.
However, the Greater Fool Theory is extremely dangerous. It completely disregards fundamental criteria such as income, revenue, product quality, or genuine demand. This theory is based solely on speculation and only works as long as the hype lasts. As soon as people stop buying, prices collapse and bubbles burst. The 2008 financial crisis serves as an example: banks had excessively purchased worthless mortgage-backed securities. For a long time, everyone portrayed these assets as valuable. But when the market returned to reality, no one wanted to buy them, resulting in the collapse of the system.
Startups can fall into the same trap. Sometimes founders strive not for real business growth, but for high valuations. They hope to find someone who believes in their dreams rather than results, and spend large sums of money, exaggerate indicators, and try to attract the next round of investment at an even higher price. This game may continue for a while. But when the economic situation worsens or stock markets crash, the “fools” disappear, and the startup either changes direction, collapses, or is sold at a much lower price than its last valuation.
Therefore, due diligence is crucial. Whether you are a retail investor or a venture capitalist, you need to understand the company’s key indicators: how it makes money, what its market position is, how much money it’s spending, and what its competitive advantage is. These will protect you from becoming a “greater fool.” By looking beyond the hype and analyzing the real numbers, team dynamics, and product strength, you can better understand whether something is truly valuable or just temporarily overvalued.
Bitcoin is often cited as a clear example of the Greater Fool Theory. Critics point out that it has no intrinsic value, consumes enormous amounts of electricity, and does not create any real products. Nevertheless, its price has increased dramatically several times. In 2017, it reached $20,000. In 2021, it exceeded $60,000. Did people buy it for long-term profits – or simply hoping that someone would buy it at an even higher price later? The answer to this question depends on who is being asked. Some say that the initial retail investors acted precisely out of hype and fear of missing out on an opportunity. Others believe that the entry of institutional buyers like Tesla and PayPal completely changed the game. Perhaps Bitcoin isn’t just a “chain of fools,” but the debate itself shows how thin the line between confidence and speculation really is.
Ultimately, the Greater Fool Theory reminds us of one truth: if you are buying something simply because you think someone will pay more for it later, but you don’t actually believe it’s worth that much, then you’re engaged in a dangerous game. In the short term, the market may reward this approach, but sooner or later, someone will inevitably be left holding the bag and bear all the losses.
Prepared by Navruzakhon Burieva
