Thread by @smdiehl

When economists describe crypto assets like bitcoin as a "greater fool" investment what do they mean? 🧵 (1/)

It's important to note the actual buying behaviour people have with crypto assets.

People buy them from a service like Robinhood or Coinbase and hold their tokens in hopes that "number go up" so it can be redeemed for dollars. This is effectively 99% of consumer behavior. (2/)

Because there's no utility or cashflow from a bitcoin, they only way one can possibly make money from this scheme is for the exchange who holds your tokens to find someone who will buy your tokens from you for more than you paid. (3/)

Except this is a really terrible form of investment because unlike stocks, bonds, or real estate there's no fundamental reason why your tokens should be worth more or less tomorrow because they're not tied to any economic activity in the real world. (4/)

When you buy a crypto token, you buy a hot potato that you then have to offload on someone else, who then has to offload it on someone else and so on and so on forever. Each person has to be increasingly more foolish to buy it for more than what you initially paid. (5/)

The problem with this should be obvious if you think about it for more than 5 seconds. There simply isn't an infinite supply of greater fools to pay out everyone on earth.

When you run out fools to sell to, the scheme collapses. (6/)

The basic math on a greater fool investment is that every one winner is necessarily paid out by multiple losers.

There are vastly more people that lose money on cryptocurrency than make anything at all. But nobody brags about their loses and so you don't hear about them. (7/)

Greater fool investments are predatory investment schemes where the "asset" has a strictly-zero net present value and where redemption for cash is purely based on increasing the pool of foolish buyers for the investment rather than on fundamentals of the asset itself. (8/)

And this is where crypto assets venture into the same territory as multi-level marketing, where investors in a token are financially incentivized to go promote the investment to others because that's the only way they'll offload their stock. The pool of fools must grow. (9/)

And that will come as no shock to anyone whose has experienced the aggressive social media crypto marketing pitch from advocates who prey on financially vulnerable people to convince them to be the next greater fool to buy into their scam. (10/)

Think about it. There is no high-pressure sales pitch for index funds or Apple stock because these are assets that have intrinsic value, and we can ascribe real value beyond just what some fool will pay for it next. (11/)

All of cryptocurrency is nothing but a bunch of snake oil salesmen making promises of money for nothing out of nothing, they just need you to invest your money early and ask that you not question the dodgy economics or externalities of the whole scheme. (12/)

Cryptocurrency is for all intents and purposes a multi-level marketing scheme of techno-babble obscurantism, distrust of institutions and libertarian philosophy that mostly preys on young vulnerable men to sell and promote token investments to their friends and families. (13/)

The reason so many of us speak up against these schemes is the same reason the anti-MLM movement speaks up beauty product pyramid schemes that prey on young women.

People really get hurt and it's on all of us to prevent the frauds because regulators won't do a damn thing. (14/)

Ask yourself the basic Economics 101 question: Where will all the actual money come from to pay out all these "number go up" paper wins people think they have?

The answer is simple ...

They need it to come from you.

You are the greater fool if you buy crypto.

/fin