3 Things Crypto Investors Can Learn About The Tulip Mania Crash And The Nature Of Bubbles
In 1636, Holland went crazy over exotic tulips in what is referred to as tulip mania — the most famous asset bubble in history.
Wealthy Dutch people, maid-servants, even chimney-sweeps dabbled in tulips. Prices rose. People speculated a year’s salary on rare bulbs in hopes of reselling them for a profit. The price of a single flower could exceed the price of a house.
The creation of futures contracts meant the flowers didn’t have to physically change hands, pushing the prices even higher. More and more farmers started growing the flowers and supply outstripped demand. After a failed tulip auction in the flower capital of Haarlem, the bubble burst.
Tulip mania still makes headlines today, especially in the debate over whether Bitcoin is a bubble or not.
When the tulip bubble burst in 1637, it wreaked havoc on the Dutch economy, depending on whose history you read.
In an 1841 account, Scottish author Charles MacKay wrote, “Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.”
However, historian Anne Goldgar says Mackay’s tales of huge fortunes lost and distraught people drowning themselves in canals are more fiction than fact. A professor of early modern history at King’s College London, Goldgar wrote the 2007 book, “Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age.”
“It’s a great story and the reason why it’s a great story is that it makes people look stupid,” Goldgar said. “But the idea that tulip mania caused a big depression is completely untrue. As far as I can see, it caused no real effect on the economy whatsoever.”
What’s certain is that the tulip market boomed in 17th-century Europe, people speculated on its price, and it ended in panic selling.
In September 2017, when Bitcoin was still worth less than $5,000, JPMorgan Chase chairman and CEO Jamie Dimon described the No. 1 cryptocurrency as “a fraud” and “worse than tulip bulbs.” Three months later, Bitcoin would come close to $20,000 in December 2017 before crashing in the next couple of days, triggering a multi-year bear run that saw its price go as low as $3,200.
It took three years for Bitcoin to reach and exceed $20,000 again. This happened in December 2020. A Bitcoin is worth $23,287.99 as of this writing. Before 2017, the previous big spike happened in late 2013. It also took about three years for the cryptocurrency to make a new high, Bloomberg reported: “Amid ridiculous volatility, some patterns are emerging. Bitcoin continues to make money for those with the gall and timing to take advantage.”
1. Tulip mania was short-lived, crypto has been here for years
The difference between bitcoin fever and the tulip bubble is that the great Dutch tulip mania collapsed and never returned. Bitcoin keeps coming back.
Goldgar spent years in the archives of Dutch cities Amsterdam, Alkmaar, Enkhuizen and Haarlem, the center of the tulip trade. She collected 17th-century manuscript data from notaries, courts and wills. What she found was a relatively small and short-lived market for an exotic luxury, not an irrational and widespread tulip craze, according to History.com.
“Bitcoin has been around long enough that it probably isn’t going away,” said Kit Juckes, a macro strategist at French investment bank Societe Generale, according to Unseen Opportunity.
2. Crypto can store value, tulips cannot
Cryptocurrency exchange Binance was interested enough in the 17th-century tulip bubble to devote a page to it on its website.
One of the biggest differences between tulips and Bitcoins is the potential to act as a store of value, Binance reproted. The tulips had a limited lifespan and it was almost impossible to tell what the flower would look like by looking at the bulb alone. Merchants had to plant it and hope that they got what they paid for. Tulips couldn’t be used for payments because they were indivisible and trying to spilt them up would most likely kill them. They were also hard to protect and easily stolen.
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By comparison, Bitcoin is digital, transferable and highly resistant to fraud, Binance claims. Bitcoin cannot be copied or destroyed and can be easily divided into smaller units. It’s also relatively scarce with a limited supply capped at 21 million units. There are some risks, but following general security principles will generally keep your funds safe.
3. Tulip maniacs were looking for a quick profit while most crypto buyers buy to hold
Tulip mania became a speculative bubble rather than a harmless pastime. People were buying in the hope of making a quick profit, and were mostly buying on credit, said Kit Juckes, a macro strategist at French investment bank Societe Generale.
With Bitcoin, by comparison, “most activity is ‘buy to hold’ by people who believe it is the natural competitor to gold as a store of value in a time when central banks are playing footloose and fancy-free with fiat money,” Juckes said, according to Unseen Opportunity.
However, Bitcoin opponent and gold enthusiast Peter Schiff predicts the crypto market is heading towards a bubble.
“Comparing the return on Bitcoin to return on gold is irrelevant, as #Bitcoin and #gold have nothing in common,” Schiff tweeted, defending his favorite precious metal. “They are not competing assets. It’s like comparing the return on gold to the return on Tesla. During bubbles, lots of assets beat gold. Gold wins once those bubbles pop”.