Is Cryptocurrency a Bubble Like the Dutch Tulips Mania?
Bitcoin and similar cryptocurrencies have been receiving so much clamour these past months. The frenzy of the public to get in, the massive surge in prices, and the emergence of alternative virtual coins all point to a market bubble similar to what happened in the Tulip Mania centuries ago.
The question is: Will Bitcoin and similar cryptocurrencies fatefully end up like those notorious tulips?
The Tulip Bubble
Four hundred years ago, history was made. It was in Holland where the infamous market bubble occurred.
The story started with the emergence of a rare variety of tulips. This variant features a flare of different colours appearing on a single bulb. It’s a standout from the typical variant which is monochromatic. Its rarity and difficulty to produce enticed aristocrats and merchant-class citizens to spend on these much-coveted flowers.
According to myths, tulip prices rose because of increasing demand as more speculators got curious on the trade. Soon, everyone wanted to get in, resulting in a demand influx that pumped the prices even further. Some say that people started selling their possessions and properties just to possess a single bulb.
The crazy thing was, actual flowers weren’t traded in the process. Rather, the bulbs that are yet to bloom were already being sold in anticipation of demand, similar to what we do now with the futures market.
In 1637, during the height of the mania, a single tulip bulb cost more than 10,000 guilders. Prices soared more than the market condition can handle. It was just too much for people to buy which eventually resulted in panic selling as demands diminished.
According to some research, the use of the term mania is exaggerated. Yes, prices soared to an amount equivalent to a modest house at that time, but the panic buying and selling didn’t happen as stated in many financial books and literary works. The Dutch economy didn’t experience a depression either, contrary to what some accounts say.
There are other studies, though, that confirm the truth of how disastrous the Tulip Mania was. It bankrupted a large number of people and it brought the country’s economy down to its knees.
Many versions of the story circulated and we’ll never know which of them is true. One thing is for sure, though. The price of tulips soared to the heavens and then plummeted back to earth. The absurd demand and the panic selling that ensued financially devastated anyone who bought at the height of the hype.
And this seems to be happening now with the surge of cryptocurrencies.
Similarities and Differences
With the massive number of people jumping into the crypto craze, it’s not surprising to see why financial experts see the same patterns in cryptos that the Tulip Bubble exhibited.
Is cryptocurrency the next Tulip bubble? To answer this question, let’s compare the two using the following premises.
Tulips were a rare commodity back then and only a few people own it. Eventually, the number of growers able to produce the priced variant grew, creating a product surplus. This greatly reduced the prices to a more reasonable level.
In the case of cryptos, no single entity controls the whole platform. There are also a fixed number of coins that circulate in the whole system, creating a limited supply at the onset. The ecosystem of investors, miners, and traders decide the value of a single coin and not by a handful of merchants only.
The Tulip Mania had a steady rise in price for years. It was not until the last quarter of 1636 to the first quarter of the following year did the hype started to show its power.
Bitcoin also has been in existence for almost a decade. The hype started last 2016 when prices started increasing to new highs. It was this 2017 that marked the peak of the value of Bitcoin.
The difference between them is that tulips are seasonal flowers while cryptos don’t care about the weather at all. The end of the harvest season also marked the death of the hype on the valued flower. Bitcoin and other cryptos, on the other hand, will stay as long as the market has a demand for it.
Tulips were only valuable within the country and its neighbouring regions. Go outside and you won’t be able to sell a single bulb at that time for $1,000.
Cryptos are available wherever there’s internet. Their value is recognized by millions of users worldwide. You can trade it anytime and anywhere you want.
The concept of cryptocurrency itself is already revolutionary. It showed how an encrypted and completely decentralized system can be used for financial transactions.
The blockchain technology, which is the backbone of the entire Bitcoin currency and similar cryptos, is still in its first phases. It’s a disruptive technology still waiting to be maximized.
Tulips, on the other hand, are simply flowers and will remain that way forever. Unless it shows some kind of miraculous purpose, there’s no future value in it aside from being a lovely flora.
The Dutch Tulips Mania and the anticipated Bitcoin Bubble have a lot of dissimilarities. Each of them exists in different market conditions and follow different business structures.
The only similarity they exhibit is the disproportionate enthusiasm investors give them to the point that they disregard the underlying mechanism that runs the business. All people want is to profit from the trade. The obvious resemblance they exhibit is that both their prices are fuelled by speculation and greed.
The price of a single bitcoin rose to a whopping all-time high of $19,535.70 last December 2017. Bitcoin is now trading at the $11,000 levels after bouncing from an $8,000 slump this February. It’s recovering from a strong selloff, which may mean it’s not dead yet.
Cryptocurrency will remain for quite some time. Unlike tulips, this one shows a promising future in terms of technological and financial advancement.
Investors must keep in mind the cautionary tale of how an absurd demand for something can eventually lead to a catastrophic market bubble. As with any investment, always put proper risk management in place to shield you from any disaster that may come.