Spoiler alert: It isn't a bubble.
Tulipmania took hold of the Netherlands in the 1600s and is widely viewed as the first financial asset bubble. A bubble is a significant increase in an asset's price that is not reflected in its value. The price increases because people think they can sell the asset for a profit, not because it's actually valuable.
That's why Bitcoin critics who don't believe the cryptocurrency has any intrinsic worth compare its growth to tulipmania.
But, as we'll see, the myth behind the tulip bubble does not necessarily match the reality. As a result, Bitcoin may have more in common with tulips than the skeptics know.
Tulipmania: The myth
Tulips are common enough now, but back in the sixteenth century, they were an exotic luxury. Newly imported from Turkey, the flowers were fragile and difficult to grow. And special strains of tulip with colored stripes were particularly popular and especially valuable.
In 1634, as the fever grew, tulip prices soared. At the peak, buyers spent the equivalent of the cost of a house on just one bulb. According to the myth, people from all walks of life risked money they needed so they could buy bulbs in the belief they could sell them for a profit. Some even borrowed money to buy tulip bulbs.
Bulbs were sold and resold before they'd even been harvested. People thought the price could only go up. That is, until an auction failed to attract any bids in 1637, and prices fell overnight. The crash bankrupted some of those who'd bought their tulip bulbs on credit. Many faced ruin, and the Dutch economy crashed, so the story goes.
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Tulipmania: The reality
According to Anne Goldgar, who wrote Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, the real story is much less sensational. The history professor spent years delving into Dutch archives to understand what actually happened.
Here are some highlights from her research:
- Nobody went bankrupt and the Dutch economy wasn't really affected. The people who lost money were mostly those who could afford to do so.
- The extreme prices were very rare. Only 37 people spent more than 300 guilders (the annual salary of a craftsman) on a tulip bulb.
- The crash wasn't due to uninformed buyers speculating on a price increase. It's more likely the price fell because of concerns about oversupply and the unsustainable nature of the market.
- Tulips were not bought by everyone and their dog. Only a relatively small number of people were buying tulips, and most of them were wealthy merchants rather than chimney sweeps.
What Tulips and Bitcoin have in common
The biggest thing tulips and Bitcoin have in common is that they are both victims of sensational headlines that don't necessarily reflect reality. Bitcoin's story is already longer than tulipmania's. And while prices have slumped recently, only time will tell whether this is a bubble for the cryptocurrency.
Another commonality? There's a reason Bitcoin and tulip prices soared. Tulips were a luxury product that became popular with a growing middle class who could afford the finer things in life for the first time. Whether it's tulips or lumber, any time demand outstrips supply, prices will increase.
As for Bitcoin, it's true that it doesn't have any more intrinsic value than gold or the U.S. dollar. But that doesn't mean any of them are worthless. Some argue that Bitcoin's technology could make it the safest database in the world. And that, like gold, its scarcity -- alongside the resources involved in mining it -- make it a good store of value.
Only time will tell if Bitcoin's price can reach new heights or if it will fall to nothing. But when people look back in 500 years and tell the true story of Bitcoin, here are a few similarities I very much hope they'll find:
- People only spent what they could afford. No investment opportunity is worth the risk of not being able to cover your monthly bills if something goes wrong. Use a reputable cryptocurrency exchange to minimize your risks -- and avoid putting your rent money into a volatile asset like Bitcoin.
- Bitcoin buyers did their research. Recent research from The Ascent showed that 9% of cryptocurrency owners don't understand how it works. Don't be one of them. Whether you're buying tulips, stocks, property, or cryptocurrency, take time to research before you spend your hard-earned cash.
- You didn't have to be a wealthy merchant to buy cryptocurrencies. Indeed, the tulip bubble was part of a change in Dutch society that showed how people could become rich without being born into money.
That said, if you don't have a lot of spare cash, it's better to only put a small amount into crypto each month than to jump in with money you don't have. That way, if the price does fall, it won't affect your day-to-day life or your ability to meet your financial goals.
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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Emma Newbery owns Bitcoin.
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