If you've been investing for a while, you may have come across a concept known as the 'greater fool theory'. This refers to certain types of 'assets' whose true value is difficult to determine, or detached from any kind of real grounding. The theory goes that the only way to make a profit from these assets is to buy them and later sell them to an even 'greater fool'. Could Bitcoin (CRYPTO: BTC) fall into this bucket?
Before we travel any further down this path, I should make clear that I am no Bitcoin hater. Indeed, I still own some of this cryptocurrency, and have done well by owning it for many years.
However, I have been pondering this question much of late. Most investments are fairly easy to put a valuation tag on because they generate a stream of income. Investment properties produce rental income, and companies, at least the successful ones, generate profit. Bitcoin, however, famously does not fall into this bucket. Bitcoin pays no income, meaning that, if you own it, you do not receive any rewards for doing so. The only way to make a return after buying this cryptocurrency is by selling it at a higher price than what you bought it for.
There is nothing wrong with this situation on the face of it. Many assets share this characteristic. Gold is one example. Fine art or wine, another. Many investors habitually invest in these kinds of assets, either hoping to preserve or grow their wealth, and are successful at doing so.
Bitcoin: Are we just waiting for a greater fool?
Bitcoin shares many of the characteristics of these assets, mainly scarcity. As such, many investors also use it as a store of wealth or buy it in the hopes of making money.
That's primarily why I bought Bitcoin many years ago. However, I am now rethinking my future when it comes to owning this digital asset. As an investor whose primary aim is to grow my wealth, not just maintain it through diversification, I'm now not so sure about what the future holds for Bitcoin.
Yes, it is a scarce asset, with only 21 million Bitcoins ever able to be minted. However, it is now clear that, contrary to many early predictions, Bitcoin has little future as a medium of exchange. At least where things stand today. It remains enormously costly, relatively speaking, to transact in Bitcoin, and, to my knowledge, no major Australian businesses accept it as a form of payment.
Bitcoin is also a prime target for cyberattacks. Late last month, US crypto giant Binance was the subject of a major hack, with more than US$6 billion in cryptocurrency stolen. Luckily, Binance customers have reportedly been compensated for this theft. However, this is still a source of concern as a holder myself.
All in all, I am less convinced than I used to be that Bitcoin is not a 'greater fool' investment. Sure, it could end up being the 'digital gold' we were all told it would be in ten years. Even so, there's an opportunity cost with holding Bitcoin. Every dollar you put into this cryptocurrency is one you can't invest in assets that generate income. As such, I am wondering whether 2026 will be the last year that I have this asset on my own books. The fear of being the greater fool is real.
