Tulipmania took over the Netherlands in the 1600s and is widely regarded as the first financial asset bubble. A bubble is a significant increase in the price of an asset that is not reflected in its value. The price increases because people think they can sell the asset for a profit, not because it is actually valuable.
This is why Bitcoin critics who do not believe the cryptocurrency has intrinsic value compare its growth to tulipomania.
But, as we will see, the myth of the tulip bubble does not necessarily correspond to reality. As a result, Bitcoin may have more in common with tulips than skeptics realize.
Tulipmania: The Myth
Tulips are quite common now, but by the 16th century they were an exotic luxury. Newly imported from Turkey, the flowers were fragile and difficult to grow. And special varieties of colorful striped tulips were especially popular and especially valuable.
In 1634, as the fever rose, the prices of tulips skyrocketed. At its peak, buyers were spending the equivalent of the cost of a home for a single bulb. According to the myth, people from all walks of life risked the money they needed to buy bulbs thinking they could sell them for a profit. Some even borrowed money to buy tulip bulbs.
The bulbs were sold and resold even before they were harvested. People thought the price could only go up. That is, until an auction drew no bids in 1637, and prices fell overnight. The crash bankrupted some of those who bought their tulip bulbs on credit. Many faced ruin and the Dutch economy collapsed, according to the story.
Tulipmania: the reality
According to Anne Goldgar, who wrote Tulipmania: money, honor and knowledge in the Dutch Golden Age, the real story is much less sensational. The history teacher spent years digging through the Dutch archives to figure out what really happened.
Here are some highlights of his research:
- No one went bankrupt and the Dutch economy was not really affected. The people who lost money were mostly those who could afford it.
- Extreme prices were very rare. Only 37 people spent more than 300 guilders (the annual salary of a craftsman) on a tulip bulb.
- The crash was not due to uninformed buyers speculating on price increases. The price is more likely to have come down due to concerns about oversupply and the unsustainable nature of the market.
- Tulips were not bought by everyone and their dog. Only a relatively small number of people bought tulips, and most of them were wealthy merchants rather than chimney sweeps.
What Tulips and Bitcoin have in common
The biggest commonality between Tulips and Bitcoin is that they both fall victim to sensational headlines that don’t necessarily reflect reality. Bitcoin’s history is already longer than that of tulipmania. And although prices have collapsed recently, only time will tell if this is a bubble for the cryptocurrency.
Another point in common? There’s a reason Bitcoin and Tulip prices have skyrocketed. Tulips were a luxury item that became popular with a growing middle class who could afford the finer things in life for the first time. Whether it’s tulips or lumber, whenever demand exceeds supply, prices go up.
As for Bitcoin, it is true that it has no more intrinsic value than gold or the US dollar. But that doesn’t mean all of them are worthless. Some argue that Bitcoin’s technology could make it the world’s most secure database. And that, like gold, its scarcity, as well as the resources necessary for its extraction, make it a good store of value.
Only time will tell if the price of Bitcoin can reach new highs or if it drops to zero. But when people look back 500 years and tell the true story of Bitcoin, here are some similarities that I really hope they find:
- People only spent what they could afford. No investment opportunity is worth the risk of not being able to cover your monthly bills if something goes wrong. Use a reputable cryptocurrency exchange to minimize your risk – and avoid putting your rent money into a volatile asset like Bitcoin.
- Bitcoin buyers have done their research. Recent research from The Ascent has shown that 9% of cryptocurrency owners don’t understand how it works. Don’t be one of them. Whether you’re buying tulips, stocks, property, or cryptocurrency, take the time to research before spending your hard-earned cash.
- You didn’t have to be a wealthy trader to buy cryptocurrency. Indeed, the Tulip Bubble was part of a shift in Dutch society that showed how people could get rich without being born into money.
Having said that, if you don’t have a lot of cash on hand, it’s better to only put a small amount in crypto each month than to jump in with money you don’t have. So if the price drops, it won’t affect your daily life or your ability to meet your financial goals.