Are Bitcoin and Cryptos Greater Fool Assets?

To answer this question, let’s first start by defining what the “greater fool theory” is. The term “greater fool asset” is often used to describe an investment that relies on the belief that there will always be someone else willing to buy it at a higher price, regardless of its intrinsic value. This term is often associated with speculative investments, and according to Wikipedia, it can be used when assets like real estate, stocks, and cryptocurrencies are priced way above their intrinsic value.

What detractors say

Detractors of cryptocurrencies argue that cryptos have no intrinsic worth and, therefore, are always “greater fool assets”. Here, things get a bit more complicated because not all cryptos are created equal. It’s very clear that many cryptos are scams whose only purpose is to take money from investors who do not do basic due diligence. Those scams are clearly Greater Fool Assets or Ponzi Schemes. But what about Bitcoin or cryptos that offer a usable service like the smart contracts of L1s (Ethereum, Cardano, Solana, etc.)?

Intrinsic Worth

Here, the answer lies in the intrinsic worth or fair value of each individual cryptocurrency. Calculating the intrinsic value of a cryptocurrency is a challenging task since cryptocurrencies lack many traditional valuation metrics, such as cash flows or earnings. However, there are a few approaches that investors and analysts use to estimate the intrinsic value of cryptocurrencies. One of the most popular is Metcalfe’s Law, which has been used to value social media platforms before they have earnings.

Metcalfe’s Law states that the value of a network is proportional to the square of the number of its users. This concept suggests that the value of a cryptocurrency can be tied to its network’s size and adoption. Put differently, the more users transact with or store a given cryptocurrency, the more value it has. Therefore by analyzing the growth and adoption of a cryptocurrency’s network, one can estimate its intrinsic value.

Applying Metcalfe’s Law

The blockchain technology on which many cryptos are based is open source. This means that it is fairly easy for anyone to analyze the usage of a given cryptocurrency with tools such as Glassnode.com or IntoTheCryptoVerse.com. Using Bitcoin as an example, we can then look at the evolution over time of active addresses or the number of wallets storing the smallest Bitcoin denomination, the Satoshi (one Bitcoin = 100,000,000 Satoshi or Sat). The two graphs below show the trends since Bitcoin’s inception in 2009.

According to Metcalfe’s Law and seeing how the usage and adoption of Bitcoin constantly grow over time, this would already suggest that it has some value. But is it fairly valued? Remember, the greater fool theory applies to assets being sold way above their fair value. Estimating the fair value of the Bitcoin network based on its growing usage is a difficult exercise. But some tools, like the logarithmic price curve from BlochChainCenter.net seen below, can help. Here, the yellow band would be an estimate of what the fair value of Bitcoin could be.

In that respect, just like when real estate or the stock market are in bubble territories (think 2008), Bitcoin and cryptos can also be greater fool assets when overpriced, like in 2018 and 2021, the red bands in the above graph. In our attempt to answer this difficult question, we use Metcalfe’s Law and factual usage data to show Bitcoin has value and then use a logarithmic price chart to estimate what its fair value could be. While the usage data is factual, the fair value (yellow band) is subjective as it is fitted to the logarithmic price of Bitcoin.

In Conclusion, it’s not that simple.

Many more components should go into pricing the fair value of Bitcoin or any crypto, as a matter of fact. For example, detractors will also say Bitcoin has no value because it has no use cases. These detractors are often privileged individuals who have the ability to open a bank account and live in a country with a stable currency and do not try an see beyond that reality. The truth is that in 2023, 1.4 billion adults are unbankable, according to worldbank.org. That’s more than 25% of the 5.3 billion adults on earth. To them, Bitcoin is a real solution.

What about hyperinflation? People in countries like Lebanon, Venezuela, Sudan, Zimbabwe, Turkey, Argentina, Yemen, Sri Lanka, etc., just to name a few, would have tremendously benefited from having part of their wealth stored in Bitcoin rather than in their local currency. Trying to price this in to get the most accurate fair value of Bitcoin is extremely difficult. Ultimately, whether Bitcoin and cryptos are considered “greater fool assets” or not depends on individual perspectives and opinions. All of them should be respected.

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