Back in the 1600s, the Netherlands was poppin’. Thanks to a bustling international trade scene, residents of the European nation were the wealthiest on Earth. But good things often end, and as the story goes, the country suffered an economic spiral when folks started spending gobs of money on…tulip bulbs.
Dubbed Tulip Mania, the speculative bubble supposedly ended the Dutch Golden Age — and in centuries since has become the gold standard for cautionary economic tales.
These days, a lot of crypto skeptics liken Tulip Mania to the virtual currency market. They typically toss out sophistries about the lack of “intrinsic value” in tokens. But is it a fair argument? Are cryptocurrencies the 21st-century version of Tulip Mania? Let’s unpack.
Tulip Mania: Fact v. Fiction
You’ve probably heard the Tulip Mania tale before, but let’s do a quick review.
The Myth
The year was 1636, and the Netherlands was making bank. Due to the nation’s strategic location and associated trade, residents of the Dutch stronghold enjoyed a very high standard of living, and with so much money circulating, commodity investments were the hot new thing.
Arrivistes were also in search of ways to display their wealth. Sure, buying the latest horse and buggy or building an impressive townhouse were all options. But what really got people’s envy up was tulips. Solid-colored ones were fine. But folks truly craved breakers: tulips with natural patterns and streaks of colors.
Unfortunately, several logistical obstacles needed to be cleared to get flowers to market. For starters, tulips are extraordinarily fragile, and moving them from place to place was a resource-intensive affair. Secondly, the bulbs couldn’t be moved from October to March because doing so stymied their spring growth.
So, as a workaround, businessmen started selling tulip futures contracts. At the peak of the spot market, bulbs were selling for extraordinary prices, and people supposedly leveraged homes for collateral. According to some estimates, investors paid up to 1,500 guilders for a single bulb — the equivalent of four years’ salary for a skilled carpenter.
But then the Bubonic plague rolled into town, which bungled a big auction in February 1637 and crushed Tulip Mania. As the fable goes, a wild six months of crazy speculation on a fickle asset led to the collapse of the Dutch economy, which never again regained its prominence.
Is that the real story, though?
The Reality
Not exactly. In Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, Anne Goldgar explains that the legend doesn’t quite gibe with the facts. For starters, a tragic plague didn’t instantaneously kill the market. Yes, it played a role. But people frequently forget one crucial factor: when the tulip craze hit, farmers started producing more flowers. So when supplies rose to meet demand, prices plummeted.
Goldgar also argues that people who couldn’t afford expensive bulbs weren’t buying them. By her research, not a single person went bankrupt because of Tulip Mania, and extreme prices were exceptionally rare. According to Goldgar’s accounting, only about 37 people spent outrageous amounts, and those 37 folks could afford to do so.
Cryptocurrencies: The Decentralized Finance Market
Naysayers will have you believe that the cryptocurrency market is a ridiculous, speculative bubble perpetually on the verge of popping. In their eyes, Tulip Mania vs. Cryptocurrency is a tie.
But is it an educated take?
Let’s break it down.
What Is Cryptocurrency?
Cryptocurrencies are digital money systems created, traded, and exchanged via blockchain technology. Tokens are mined by computers that solve complex cryptographic puzzles, and most virtual currencies have a built-in scarcity ceiling. For example, bitcoin has a market cap of 21 million; to date, a little over 18 million coins have been mined.
The Bitcoin Story
The first cryptocurrency, bitcoin, debuted in 2009, and early adopters gathered and traded tokens worth nothing. But in 2017, their hobby paid off when bitcoin’s popularity mushroomed. Interest quadrupled, and big players entered the market. By April 14, 2021, the digital currency had reached its highest valuation to date: $64,863.
What the Naysayers Think
In the eyes of the traditional financial establishment, bitcoin, ether, litecoin, and other tokens are unreasonably risky because they have no “intrinsic value.” And at first, that may sound valid. But when you consider that the United States dropped the gold standard in 1933, the “intrinsic value” argument crumbles. After all, one of the world’s foundational monetary systems is only worth as much as society deems it. That’s the nature of modern currency. None of it has “intrinsic” material value.
In 2020, financial journalist John Authers summed up the naysayer position by calling bitcoin a “speculative frenzy” and characterized crypto enthusiasts as people who believed that “central banks will debase fiat currencies.” But even Authers had to admit that bitcoin “continues to make money for those with the gall and timing to take advantage.”
A Smattering of Similarities Between Tulip Mania and Cryptocurrency
Tulip Mania and the cryptocurrency market have two main things in common. Both featured assets that skyrocketed in value over a short period, and both inspired sensational headlines. But the resemblance pretty much ends there.
Five Differences Between Tulip Mania and Cryptocurrency
What are the differences between Tulip Mania and the virtual currency market? Five main things separate the two economic events: length, logistics, scarcity, real-use application, and innovation.
Tulip Mania vs. Cryptocurrencies: Length
Tulip Mania lasted about six months. The cryptocurrency industry turned 12 years old in January 2021. In other words: crypto isn’t the flash-in-a-pan bubble some people would have you believe. Sure, a touch of “mania” may have hit the crypto market in 2017, but things have since calmed, crypto is still around, and it’s maturing into a viable player on the tech and financial landscapes.
Tulip Mania vs. Cryptocurrencies: Logistics
Tulip logistics are terrible. They take their sweet time growing from seedlings to bulbs, the final product has a limited shelf life, and safely transporting tulips requires considerable manual labor. On the other hand, Cryptocurrencies can zing around the planet in a matter of minutes, making them infinitely more useful.
Tulip Mania vs. Cryptocurrencies: Scarcity
Sure, during Tulip Mania, some bulbs were scarce, which heightened their perceived value. But once tulips became the “in” thing, growers planted more. Most cryptocurrencies — bitcoin specifically — have scarcity built into the model to mitigate inflationary forces. Also, bitcoin’s market cap makes it a good store of value.
Tulip Mania vs. Cryptocurrencies: Real-Use Application
Tulips are pretty, but that’s about it. Most of them are even odorless! Cryptocurrencies, on the other hand, have real-use opportunities. You can pay for things with digital currencies, plus they facilitate cross-border payments and can be used to shelter funds. So in terms of real-use applications, crypto has value — another point separating it from the tulips of Tulip Mania.
Tulip Mania vs. Cryptocurrencies: Innovation Quotient
Tulips weren’t a revolutionary innovation; originally, they were wildflowers found in Asia that Turkish people started cultivating around 1000 AD. On the other hand, blockchain is a revolutionary technology that has the potential to change the face of business.
Consult With a Cryptocurrency Lawyer
Based in Arizona, the Kelly Law Firm works with crypto exchanges, startups, and high-value token investors worldwide. If you’re ready to speak with a digital currency lawyer about a legal matter, please get in touch using the form below. We’ll get back to you right away.
