Many times we hear people say that Bitcoin will crash like the Tulip Mania in the 17th century. Imagine, close to 400 years later, people still talk about one of the oldest if not the first speculative bubble.
Tulip Mania is when in the 1637, the contracts of Tulip bulbs in Netherlands went to unprecedented prices and later collapsed dramatically. Historians are still debating whether or not it cost a significant loss to the economy. Nevertheless it left a lot of people with huge losses. Now, let’s understand what happened.
What is Tulip?
Tulip is a large brightly coloured, Spring-booming flower that initially grew in the stretch of Southern Europe to Central Asia. Tulips grew in Asia from the 10th century but only became popular in the West in the Sixteenth and Seventeenth century when the trade vessels began carrying them to Europe from Asia. It can take years for a Tulip to fully develop as a flower.
Initially Tulips were found in Red, White and Yellow colours. However, a virus, now known as the Tulip Breaking Virus would infect the flower and create 2 coloured patterns on the Tulip. These patterns would look like a fire of a different colour. Due to the unique design on the Tulips, they became even more of a priced possession.
During the Summer, the leaves of the Tulip would die and the Tulip would submerge in the ground as Bulbs. Bulbs are natural way of Tulip to survive the harsh weather. The tulip buds are covered with the stem and leaves providing nourishment to the bud. In the winter they would bloom again.
What was the Tulip Mania?
In the 1630s, Holland was going through what’s known as the Dutch Golden Age. The Netherlands was known as the finest in Science, Art, Trade and Military around the world. The spending power of the middle class citizens improved as a result and hence they started spending on luxury items.
Tulips were new to the Netherlands and hard to get, which made them a status symbol. The wealthy began to buy more Tulips as a show of wealth. Basically the house with more Tulips became recognised as the house with more money.
The Tulip market boomed and the prices went up as the demand increased. Tulips were selling at as much as 50 Guilders. To put it in perspective, 50 Guilders in 1630s would be equivalent to the purchasing power of $3000 or Rs. 200000. At the time, the wages of a non-skilled worker were 110 Guilders a year. The prices will eventually rise at a value that could mean 15 years of wages of a skilled worker.
Soon, people were not growing Tulips but buying them. This further reduced the production of the Tulip and increased the prices. The prices went insanely high and the demand just could not be kept up with. This was the beginning of the Tulip Mania.
Eventually Spring was over and the Tulips had retreated inside the ground and taken the form of Bulbs. Then came the Buying Contracts for Bulbs.
The Future Contracts of Tulips
Here’s where things get interesting. The Dutch were already paying a really high price for Tulips. The Tulips were not available and people wanted to make money. Hence the contracts were brought in.
The Future contract for Tulips would be something like this
A Buyer will pay 1000 Guilders for a contract that states he will receive 5 Tulips from the seller when the Tulips boom
The problem though, there were no regulations on Contracts
Soon, instead of Tulips, contracts began to be traded. The above 1000 Guilders contract would then be bought by someone for 2000 Guilders, then by someone for 4000 guilders and so on. There were very less fees on transferring the contracts. It is said to have been about 2.5%. The Tulip prices and the contract prices were sky rocketing. Hence began the Tulip Mania.
And then the Bubble burst.
The Tulip Bubble Burst
On February 3, 1637 a Tulip auction interested no buyers. Fearing the demand had ended, panicked merchants started selling Tulips for lesser prices, eventually crashing the price of Tulips. Many florists had sold contracts, which means they traded Tulips that weren’t even there to begin with. In other words, Tulips that were not theirs were sold to people who could not afford it.
The Tulip Bubble burst caused a vast amount of people a significant loss of money. However, the Dutch economy improved and expansion continued. The Tulip Mania did not cause a significant dent in the economy as some economists suggest and yet it has become the most popular example for failures of trade.
Is Bitcoin a bubble like the Tulip Mania?
There are many arguments for and against the motion. I personally would like to remain leaning against the argument. Bitcoin is not like a Tulip Mania.
My arguments are the charts below and I respect everyone’s opinion.
From the charts I want to show you that Bitcoin has boomed and busted several times historically, but it never died. Look at the last chart from 2015-2018. Bitcoin has not repeated the pattern. In fact Bitcoin is back on the rise and some investors suggest that $6500 is the lowest bottom, it cannot go further down. $6500 is 500% above the value of Bitcoin in April 2017, a year ago.
Tulip Price Chart (1634-1637):
Bitcoin Price Chart (2010-2012):
Bitcoin Price Chart (2012-2014):
Bitcoin Price Chart (2014-2018):
Bitcoins have no Intrinsic value and Prices are speculative.
Bitcoin prices are certainly speculative in nature and much like flowers, Bitcoin has no intrinsic value. But if you think about it, what actually does have an intrinsic value?
Gold? Maybe now we trust it more because we have been trusting it since thousands of years. Ultimately it is just a metal that is limited in supply, hence the prices go up when demand increases. Bitcoin has limited supply, it has value like gold has value. If people are willing to pay for it, that becomes the value.
Fiat? Gone are the days of Gold standards and the US has been printing Dollars on a whim. Paper money has no intrinsic value. Money has value ascribed to it overtime. (Read: Where does your money come from?)
In the 19th century, paper money was held in bad reputation because it seemed so ephemeral and detached from value that could be easily recognised: land, gold, size of armies.
Diamonds? Have you ever tried selling a Diamond? You will not get even 50% of the value of the purchased diamond once you leave the store. Diamonds are artificially inflated assets and they are nothing but polished carbon, and yet due to a successful ad campaign by De Beers in the 1930s we believe Diamonds are forever.
“Diamonds are intrinsically worthless”
– De Beers Chairman Nicky Oppenheimer
The Independent, Feb 13th 1999
Bitcoin can eradicate the need for central banks or banks in general. Sending money from one corner of the world to another has never been this cheap or easy. No wonder the governments and banks are nervous. But Bitcoin has its fair share of problems. That is a story for another time.