Three hundred and eighty-six years ago today, the first bubble – the so-called Tulip Mania – popped. Often compared to Bitcoin, Tulip Mania provides the blueprint for all future bubbles and related behavior.
To celebrate the anniversary of Tulip Mania, we once again compare the first recorded bubble example to Bitcoin and dispel the idea that there is a true similarity.
The Dutch Golden Age & the Formation of the First Speculative Bubble
During the Dutch Golden Age, the Netherlands became the world’s largest economic superpower. The initial hysteria of futures contracts for tulips began in 1634 and peaked on February 3, 1637 – 386 years ago.
The Netherlands debuted the first futures contract, which eventually led to feverish speculation and the first record of the socio-economic phenomenon now called the “bubble”.
Relatively worthless tulips (by price comparison) are bid for up to ten times the annual salary of a “skilled craftsman,” says Wikipedia. The term Tulip Mania is now used “metaphorically to refer to a large economic bubble when asset prices deviate from their intrinsic value.”
An outbreak of bubonic plague helped burst the bubble by forcing buyers and sellers to avoid appearing at traditional daily auctions. However, it also said that fear surrounding the outbreak led to strong speculative behavior that drove prices down.
Bitcoin: “Worse than Tulip Mania”
Tulip Mania was popularized again in the 1841 book Extraordinary Popular Delusions and the Madness of Crowds, and has since become a popular comparison whenever an asset rises beyond its intrinsic value. Comparisons are used even more frequently when the intrinsic value of the asset is in question.
The dot com bubble has been compared to Tulip Mania, and Bitcoin and newer cryptocurrencies. Nout Wellink, the former president of the Dutch Central Bank, the originator of Tulip Mania, called Bitcoin “worse than Tulip Mania” in December 2013.
“At least you got a tulip, now you don’t get anything,” he explained. Because Bitcoin is backed by a distributed cryptographic ledger and has no physical presence, experts struggle to see the intrinsic value of the asset.
Bitcoin has climbed more than 1,800% since Wellink's comments | BTCUSD on TradingView.com
Several different models have been designed to give BTC the same market value, but the results are inconclusive and more evidence is needed. For example, the well-known stock-to-flow model estimates the price of Bitcoin to be over $100,000 when the top cryptocurrency is trading below $20,000.
When Bitcoin hit $20,000 for the first time in late 2017, its intrinsic value became wildly disconnected from reality and thus a bubble popped. The fact that Bitcoin continues to make all-time highs shows that it is more than just a bubble and that the world continues to see its intrinsic value – even if others don’t.
The truth is that Bitcoin has bubbled up not once, or twice, but a total of four times in a month, and it may very well do it again. The next time investor speculation seems to get out of hand and BTC pushes far beyond its intrinsic value, it will be time to sell because the bubble will burst again.
As a parting thought, if investors can go through a period of extreme speculative behavior that leads to a bubble, can the extremes create what means the bubble reverses from falling prices? And with sentiment more bearish than at any other time in history, is this inversion bubble in Bitcoin starting to burst?
There is much to learn from the history of past bubbles, starting with the first one. 🌷 https://t.co/r2LzynO7RP
– Tony “The Bull” (@tonythebullBTC) February 3, 2023