The Tulip Mania is considered by many as the first recorded story of a financial bubble, which supposedly occurred in the 1600s. Before discussing if the Tulip Mania was really a financial bubble or not, let’s go through the most common narrative that considers it to be a real bubble.
The Tulip Mania Bubble
The Tulip Mania took place in the Netherlands, during the Dutch Golden Age. The country had the highest global per capita income at that time, thanks to its growing international commerce and extensive trading operations.
The economic boom helped many people achieve wealth and prosperity, which in turn drove the market for luxury goods. In this context, one of the most coveted items were tulips, particularly those that had a mutation to make them even more stunning than the typical flowers. These unique flowers were much different from the other options available, so everyone wanted to show them off due to their unusual colors and patterns.
Depending on the variety, the price of a single flower could easily exceed the income of a skilled worker or even the price of a house. The creation of futures contracts pushed the prices even higher as the flowers didn’t have to physically change hands. It’s said that the bubonic plague also had an impact on the market because people were more inclined to take investment risks.
But with more and more farmers growing the flowers, the supply eventually got too high, and the tulip market found its peak in February of 1637. There was a sudden lack of buyers, and after a failed tulip auction in Harlem, fear and panic spread very quickly, causing the bubble to burst in a just a few days.
Historians aren't sure whether any bankruptcies actually occurred due to Tulip Mania, as financial records are hard to come by from that period, but the crash certainly caused significant losses to investors that were holding tulip contracts. But what does it have to do with Bitcoin?
Tulip Mania vs. Bitcoin
The Tulip Mania is considered by many as a prime example of a bursting bubble. The popular narrative describes an episode of greediness and hype that drove the price of tulips far beyond reasonable levels. While savvy people started to get out early, the late ones were panic selling after the free fall started, causing many investors and service providers to lose a lot of money.
It is quite common to hear that Bitcoin is another example of a financial bubble. But, connecting the Tulip Mania with Bitcoin fails to account their different asset classes and market circumstances. Our current financial environment is completely different and with far more players than the tulip markets of the 17th century. Moreover, the cryptocurrency markets are quite distinct from the traditional markets.
One of the biggest differences between tulips and Bitcoins is the potential to act as a store of value. The tulips had a limited lifespan, and it was almost impossible to tell the exact variety or appearance the flower would have just by looking at the bulb alone. Merchants would have to plant it and hope that they got the exact type that they invested in, especially if they paid for one of the rare colors. Other than that, if they wanted to transfer tulips, they needed a way to safely ship them to their destination with all of the associated costs. Tulips were also unsuitable for payments because it was not possible to divide them into smaller parts, as that would most likely kill the plants. In addition, flowers could be easily stolen from fields or out of a market stall, making them harder to protect.
In contrast, Bitcoin is digital and can be transferred within a global peer-to-peer network. It is a digital currency that is secured by cryptographic techniques, making it highly resistant to frauds. Bitcoin cannot be copied or destroyed and can be easily divided into multiple smaller units. Furthermore, it is relatively scarce, with a limited supply fixed at a maximum of 21 million units. It is true that the digital world of cryptocurrencies presents some risks, but following general security principles will likely keep your funds safe.
Was Tulip Mania a real bubble?
In 2006, the economist Earl A. Thompson published an article entitled “The tulipmania: Fact or artifact?” where he discusses how the Tulip Mania wasn't related to a market frenzy, but to the implicit conversion, by the government, of tulip futures contracts into options contracts. According to Thompson, the episode cannot be considered a bubble because “bubbles require the existence of mutually-agreed-upon prices that exceed fundamental values,” which wasn't really the case.
In 2007, Anne Goldgar published a book entitled “Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age,” where she presents lots of evidence that the popular Tulipmania story is actually full of myths. Based on extensive archival research, Goldgar’s arguments indicate that both the rise and the burst of the tulip bubble was much smaller than most of us tend to believe. She states that the economic repercussions were pretty minor and the number of people involved in the tulip market was quite small.
Regardless of whether the Tulip Mania was a financial bubble or not, it is certainly irrational to compare tulips to Bitcoins (or any other cryptocurrency). The event took place almost 400 years ago, in a completely different historical context, and flowers cannot really be compared to a digital currency that is secured by cryptographic techniques.