The Dutch tulip bulb market bubble is to this day one of the most famous market bubbles of all time, as well as a cautionary tale. It occurred in Holland during the early 1600s when speculation drove the value of tulip bulbs to extremes.
At the height of the market, the rarest tulip bulbs traded for as much as six times the average person’s annual salary.
The Tulipmania crashed spectacularly, plunging speculators and investors into economic ruin and despair. This colourful cast of characters includes Turkish sultans, Yugoslav soldiers, French botanists, and Dutch tavern keepers-all centuries apart historically and worlds apart culturally, but with one thing in common: tulipomania.
But is the current bitcoin bubble different from the Tulip Mania?
On one hand, we have a flower – a delicate and exotic Eastern import that had bewitched people alike.
And on the other, we have a cryptographically-secure, unhackable, decentralized, global digital currency that was specifically designed to mimic the properties of gold.
Do you still feel like this is a valid comparison?
The point where a Bitcoin (BTC) differs from a Tulip bulb is in how people derive value from both of them.
Tulips, at the top of their hight during the mania, were selling at the cost of a house. It is clear that intrinsically that tulips are not worth that much to anyone. The end user of a tulip bulb is a gardener or a person using it for adornment, both of which would not trade their house for a tulip. Once it became apparent to speculators that there was no real buyer for these tulips, they all tried to sell, thus creating a bust.
Currencies are unlike tulips in the way that they meant to not have intrinsic value. In that way, the US dollar or an Indian Rupee is also like Tulip mania. Intrinsically, the paper and ink a dollar or rupee is made with are worth hundreds of times less than what a dollar or rupee is actually worth. But thats ok because people don’t “buy” currencies for their intrinsic value, they buy them for their perceived value.
Bitcoin has a predefined amount of 21 million coins by design, while you could go and grow a billion tulips the supply is basically endless, thereby making a bitcoin scarce deriving it’s perceived high value.
So while the Bitcoins story may end up like the Tulip Mania story, in a bust, It could be for a different reason altogether. For Bitcoin to bust, it would need to “break” technically. Bitcoin will not bust due to its investors suddenly realizing it’s not intrinsically worth anything because they already know that! No currency is worth anything to anyone without other peoples perceived value in it.
So let’s wait and watch how the story unfolds. As for those who have already invested in it, this quote perfectly sums up their sentiments.
“It is difficult to get a man to understand something when his salary depends on his not understanding it.” – Upton Sinclair