Many consider the Tulip Mania to be the first financial bubble in history, which occurred around 1636. Before discussing whether tulip mania was a bubble, let's look at the most common information that confirms this.
Tulip mania bubble
Tulip mania occurred in the Netherlands during the Dutch Golden Age. At that time, the country had the world's highest per capita income, thanks to rapidly growing international trade and active financial transactions.
The economic boom helped many people achieve wealth and prosperity, which in turn led to the growth of the luxury goods market. One of these most coveted items were tulips, especially those that had a peculiar mutation that made them even more stunning than the typical tulip. These unique flowers were very different from other available options, so everyone wanted to show off their unusual color and flower pattern.
Depending on the variety, the price of a tulip could exceed the income of some workers or even the cost of a house. In addition, their value on the futures market has increased greatly since the flowers did not physically change hands.
Eventually, the supply of tulips became too high due to the influx of farmers who devoted all their land to growing the flowers, which subsequently led to the bursting of the bubble in February 1637. The sudden lack of interest among buyers and the subsequent failure of a tulip auction in Harlem created fear and panic that quickly spread across the continent, causing the bubble to burst within just a few days.
Historians cannot say exactly how much the population involved went bankrupt, since very few financial records remain for this period, but the collapse in the value of the unique flowers certainly caused significant damage to the investors who held contracts for tulips. But what does this have to do with Bitcoin?
Tulip mania and Bitcoin
Tulip mania is considered by many to be a prime example of a bubble bursting. A popular example from history describes an episode of greed that drove the price of tulips beyond reasonable levels. While experienced people began to exit the market, others panic-sold during the free fall in prices, causing many investors and suppliers to lose large amounts of funds.
It is quite common to hear that Bitcoin and other cryptocurrencies are also in a bubble and follow a similar pattern. However, the financial world has changed a lot and there are many more players in it than in the 17th century, so any comparison of tulip mania with Bitcoin is misleading. Moreover, cryptocurrency and traditional financial markets are very different in many other aspects.
Main differences
One of the biggest differences between tulips and Bitcoin is the ability to be a store of value. Tulips had a limited lifespan, and it was almost impossible to determine exactly what a flower's appearance would be just by looking at a single bulb. Traders had to grow and hope that they would get the particular species they invested in, especially if they paid for one of the rare flowers. Moreover, if they wanted to transport tulips, they needed a way to safely get them to their destination, with all the associated costs. Tulips were also unsuitable as a means of payment as they could not be divided into smaller pieces as this would simply kill the plant, and the flowers could easily be stolen from the fields or from the market stall, making them even more difficult to protect.
Unlike tulips, Bitcoin is a digital currency and can be easily transferred from one user to another through a global peer-to-peer network. It is a cryptocurrency that is protected by cryptographic methods, making it highly resistant to fraud. Bitcoin cannot be copied or destroyed, and can easily be split into small pieces of a single coin. It is also a relatively scarce currency, with a limited supply of 21 million units. It's true that the world of cryptocurrencies presents its own risks, but following basic security principles will likely help you keep your funds safe.
Was Tulip Mania a real bubble?
In 2006, economist Earl A. Thompson published an article entitled "Tulpmania: Fact or Artifact?" in which he described how tulipmania is actually related to the government's attitude toward flower futures and options, which is fundamentally at odds with the original concept. madness in the market regarding tulips. According to Thompson, the Tulip Mania episode cannot be considered a bubble, as he said: “bubbles require mutual agreement on a price for a product that exceeds the fundamental value,” which in fact did not happen.
In 2007, Anna Goldgar published a book called Tulip Mania: Money, Honor and Knowledge in the Dutch Golden Age, where she presented a wealth of evidence that the popular story of Tulip Mania is, in fact, full of myths. Based on extensive archival research, Goldgar's arguments show that both the rise and the explosion of the tulip bubble were much smaller than most of us tend to assume. She states that the economic impact was quite minor and that the number of people involved in the tulip market was quite small.
Conclusion
Regardless of whether the tulip mania was a financial bubble, comparing tulips to Bitcoin (or any other cryptocurrency) is definitely pointless. This event took place almost 400 years ago in a completely different historical context, for this reason it is rather foolish to find anything in common with flowers in comparison with a global digital currency protected by cryptography.