Tulips, Bitcoin and Bubbles

You may recall that way back in the early days of GradMoney, we discussed the invention of the stock market and the very first stock market bubble, which took place in the Netherlands in the early 17th Century. Many analysts are starting to see the writing on the wall with Bitcoin and note its similarities to the tulip craze that plagued the Dutch stock market in the 1630s.

Before we go into that, it helps to have a refresher on the stock market and why we are talking about tulips…and bubbles.

When I was in 12th grade, my European history teacher must have had a premonition that I was destined to work in the stock market. He hand-selected individual book assignments for each of us, and for me he selected “Tulipomania: The Story of the World’s Most Coveted Flower & the Extraordinary Passions it Aroused” by Mike Dash. Below is a photo of the book from modern times and the originally Dutch paper that derived the history.

What do tulips have to do with the stock market?

Many people don’t know that the Dutch were responsible for the creation of the stock market back in the 1630’s. Average, everyday people were caught up in a new frenzy of buying and selling, in this case, the first stock futures. The book delves primarily into the history of the tulip itself, and how it made its way across Asia, to the Middle East, and ultimately to Europe and the Netherlands – where it is most prominently popular.

In creating the first “tulip futures” the Dutch in turn were responsible for creating the first “stock bubble” in history. The Dutch brought back the first tulip bulbs from Turkish palaces, and there was such a frenzy and such demand for tulip bulbs that people began investing all of their life savings into pieces of paper that entitled them to partial ownership of a tulip bulb. The demand, and hence the perceived value, for tulip bulbs got so high that a single bulb was worth as much as a house!

Sounds silly right? This is precisely what a bubble is – when something is perceived to have exceptional value when in reality, it’s true value really only lies in what someone is willing to pay for it. Tulips are hearty, they grow virtually everywhere in the spring, and the bulbs replicate themselves rather quickly. Once the public started to realize that tulip bulbs really had no intrinsic value at all, the entire market for them collapsed.

Fast forward to today, and investors still have not learned their lesson when it comes to market bubbles.

Statista noted in the chart below that while technology has advanced greatly over the course of the past 400 years, human psychology has remained the same. Some observers think the rally around the cryptocurrency Bitcoin might replace Tulip Mania as a reference for a badly over-inflated asset bubble prone to burst at any moment.

Then again, there already has been deflation from the peak of a little more than 19,900 to 17,600 dollars per Bitcoin. But nobody knows if the puncture will let the balloon slowly deflate or it will rip it apart, crash landing the Bitcoin.

No generation is immune to bubbles in the market; this requires overcoming human emotions, which have regrettably not changed much in 400 years.