What Is Tulip Mania? Exploring the First Financial Bubble and the Bitcoin Market

Finance and economics as we know them now are majorly a result of various events that affected the world’s economy. Some events left more impact than others, but the knowledge around finance and economics has grown largely due to these events.

Students, investors, economists, and researchers have created concepts, discarded some, and adjusted the rules that already stood. One economic concept that has a rich history is the financial bubble. A financial bubble is a period in an economic market characterized by a significant rise in the market price of assets, enough to exceed their original valuation. The first financial bubble to be recorded is known as Tulip Mania.

History of Tulip Mania

Tulip mania, or the Dutch Tulip Mania, originated from a market frenzy based on exotic Tulips. The bubble was largely concentrated in Holland during the 1630s. It began when exotic tulips arrived in Europe via spice traders. The tulips and bulbs quickly became regarded as luxury items since there were no native flowers that could be compared to them. Also, the nature of the flower disagreed with transplantation and required extremely cautious cultivation.

The upper class of Dutch Society started acquiring tulips, and they became an item found in the gardens of the affluent. The tulips and their bulbs soon became a representation of their owner’s financial status. Not long after, the middle class, in a bid to keep up, increased the demand for tulips.

Traders made high profits by buying tulip bubbles and selling them for almost double the price. The tulips were classified and valued differently, with the most expensive valued as high as $1 million in today’s money. Other classifications traded for several thousand florins which are now valued at about several hundred thousand dollars.

Between 1634 and 1636, the demand for tulips rose so high that it was officially registered on the Stock Exchange of Amsterdam. Tulips became the fourth leading export of the Netherlands. Some made a profession of cultivating tulips by reinventing techniques to grow the flowers in Holland. They discovered that locally grown tulips derived from seeds from the mother bull took several years to flower, a situation that hampered the market supply.

Buyers and sellers began entering agreements for tulips to pay later. Some people took loans against their agreements, hoping to pay off the loan and make a profit when their tulips were delivered. Eventually, by late 1636, the Dutch Tulip mania burst. More sellers failed to gather capital to pay for the tulips. Those who could pay were unable to find sellers, and either had to sell at a loss or go bankrupt.

What Is Tulip Mania?

Tulip mania, or the Dutch Tulip Mania, is a term used to describe a period in history when market prices for exotic tulips rose incredibly and exceeded the market value. Tulip mania is generally considered the first recording of a market or financial bubble. Between 1636 and 1637, the prices of tulip bulbs increased by more than twenty times their original price. By May 1937, the prices of tulip bulbs had fallen so much that their value was now under 2% of its highest price.

Source: ReadOn

Was Tulip Mania a Real Financial Bubble?

The end of a financial bubble is also characterized by a burst which often causes long-term effects such as an economic recession or depression.

However, when the tulip mania bubble burst in 1637, it didn’t significantly affect the Dutch economy. The fall of the market caused some uproar, but most of that resulted from the moral and social implications of people failing to live up to their agreements. Anne Goldgar, in her book, Tulipmania: _Money, Honor, and Knowledge in the Dutch Golden Age, _argues that most stories surrounding the tulip mania bubble are myths.

Economist Earl A. Thompson also argued that the tulip mania was not a bubble at all. His argument was based on the fact that bubbles require the existence of mutually agreed-upon prices that exceed fundamental values, a requirement that was absent in the Dutch Golden Age.

Nevertheless, many historians, economists, and researchers still consider the Dutch Tulip Mania Bubble to be the first example of a financial bubble. Like all other financial bubbles, the tulip mania was characterized by a significant rise in the prices of tulip bulbs. The prices, having reached a tipping point, began to fall, as is common with financial bubbles.

Tulip Mania vs. Bitcoin

Some bitcoin contrarians often compare Tulip mania to Bitcoin. Most of their arguments are that the price of bitcoin, alongside other cryptocurrencies, is dynamic and gives room for speculation.

The arguments grouping the Tulip Mania bubble and bitcoin are at most fallacious. Bitcoin contrarians who chose this argument often fail to consider the stark differences between the asset classes and the market circumstances. The Tulip mania bubble was based on mere plants, which rose to twentyfold of its original price due to speculation in the market. On the contrary, Bitcoin has been around since 2009, and while it has reached an all-time high of $69,000, its story is far from over.

One major feature that sets bitcoin apart from tulips of the Dutch Golden Age is its potential to serve as a store of value. Tulips had no real value because of their limited lifespan. There was also no way to tell what variation a tulip bubble was until after it had been planted. Moreover, the underlying assets that were being traded during Tulip Mania (tulip bulbs) were not a new innovation and had a tangible value, while Bitcoin is a digital asset that is based on a decentralized technology called blockchain. The value of Bitcoin is derived from its perceived utility as a medium of exchange and store of value.

Conclusion

Regardless of Tulip Mania’s significance as a financial bubble, it cannot be compared to Bitcoin or other forms of cryptocurrencies. The former, mere flowers, have no place besides digital currencies that are protected by cryptographic methods. Moreso, the Tulip Mania incident occurred more than 400 years ago in different market settings and historical contexts.