Tulip mania, also sometimes referred to as tulipomania, was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed. At the peak of tulip mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. Historically, this is considered one of the very few examples of economic bubbles that become so big as to turn into an economic crisis.
The origins of the phenomenon can be traced back to the early 1630s when the tulip bulb (Tulipa) was introduced into Europe by Gerrit Keijzer, who traveled from the Netherlands to Istanbul in 1557. For centuries, the tulip has been synonymous with beauty and luxury. The bulbs were cultivated throughout southern Europe and became popular amongst collectors for their unusual patterns and colors. However, due to their high price – during the 18th-century prices started at a few pence per bulb -, they were mostly used as a luxury item rather than an essential commodity or investment product.
In the middle of the 17th century, the bulb trade started to be influenced by speculation, fueled by the rise of precious metal prices. Prices for bulbs rose dramatically in 1636 and 1637: in these two years, a single tulip bulb could be sold for as much as 10 times the annual income of a skilled craftsman. Although this was a huge amount relative to average income at that time, it was almost negligible considering the enormous sums that were circulating throughout Europe (about 200 million guilders worth). The reason behind such price revolution was not that bulbs became rare or more valuable but rather that their rarity was artificially created by contract sellers who made sure they were not snapped up by buyers.
By 1636, a population of speculators had begun to appear around the market. "Bulbs" were not a tradable commodity but rather contracts, which later came to be known as "tulipmania contracts". The mechanism of the so-called tulipmania was very similar to modern-day derivatives. In particular, futures contracts or options - call and put options - allow people to speculate on price changes of an underlying asset in the future. In 1636 and 1637 prices for bulbs were fixed in multiples of 100: if the price rose above this level, contract sellers received a penalty which significantly reduced their payoff.
Cryptocurrencies such as Bitcoin and Ethereum today are different from the tulip bulbs in terms of their transaction costs, which are, for now, hard-coded into the protocols. The potential impact of cryptocurrencies on economics is huge. However, it is important to understand some of the key differences between the two phenomena: while tulips flourished and bulbs were traded in speculative markets, cryptocurrency assets have only emerged recently. In other words, there are far fewer cryptocurrencies than there were tulip bulbs at their peak and it would be foolish to compare them with one another.
Furthermore, cryptocurrencies are not a luxury item but an essential asset increasingly used by millions across the globe - people buy coffee with Bitcoin, they pay for flights with Ethereum. You can wager with Litecoin at the betting sites on Topbets Kenya. A comparison between the two is futile if we are trying to understand how a tulip bulb market, which was unrelated to any broader economy, could have affected the world around it.
The argument that people who are buying Bitcoin today are gambling rather than investing is also questionable when one takes into account that in order to purchase even one Bitcoin today one must have a good job. For many young people, just purchasing some of these assets is already equivalent to buying a house or car (or even multiple houses and cars), and indeed buying several coins means getting closer to becoming rich overnight.
What is more, cryptocurrency prices are largely dependent on the activity of an economy of hundreds of thousands of people, which is growing day after day. They are also about to be used as payment in billions of transactions - not just speculative transactions, but essentially payment for real-world goods and services. The situation today is radically different than during tulip mania, when there was no significant public interest or market demand and buyers were merely hoping to profit by reselling bulbs - it was purely speculative demand.
This bubble argument also fails to take into account that unlike a tulip bulb contract the value of cryptocurrencies can be assessed in other ways. We can look at the supply of Bitcoin and Ethereum today - 18.5 million BTC and 116 million ETH, respectively, - which is fixed in the protocol. This is an example of currency deflation and a good indicator of how scarce these assets are,.
The bottom line is that while both have a "market bubble," it would be immature to compare the 2000s housing market crash with cryptocurrency, simply because both are fundamentally different phenomena. The situation with tulip bulbs was completely unrelated to any broader economy, yet cryptocurrencies are an integral part of today's economy with thousands of individuals dedicating their daily lives to this new market.
Today, the cryptocurrency economy is still in its early stages and it would be foolish to compare it with the economic bubble of the past. As more investors put their money into this new market we are certain that the technology will flourish, in turn benefiting society at large.
By comparing cryptocurrencies with the tulip bulb bubble we are not dismissing the risks associated with buying digital assets today. There is still a lot of uncertainty and volatility in the market, but that is what investors face today. It might not be that risky for an investor to buy one Bitcoin or a few Litecoins today - considering the fact that their value can be reflected in other means -, but it would be foolhardy to invest more than you can afford to lose. In any case, do your own research before deciding what and how much cryptocurrency to buy.