Three hundred and eighty-six years ago today, the first ever bubble – dubbed Tulip Mania – popped. Often compared with Bitcoin, Tulip Mania provided a blueprint for all future bubbles and related behaviors.
To celebrate the anniversary of Tulip Mania, we are once again comparing the first recorded instance of a bubble with Bitcoin and dispel the idea there are any valid similarities.
The Dutch Golden Age & The Formation Of The First Speculative Bubble
During the Dutch Golden Age, the Netherlands became the largest economic superpower in the world. The initial hysteria surrounding futures contracts for tulips started in 1634 and peaked on February 3, 1637 – 386 years ago..
The Dutch debuted the first futures contracts, which ultimately led to feverish speculation and the first record of the socio-economic phenomenon now referred to as a “bubble.”
Relatively worthless tulips (by comparison to prices) were bid up to ten times the annual salary of a “skilled artisan,” Wikipedia reads. The term Tulip Mania is now used “metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.”
An outbreak of the bubonic plague helped burst the bubble by forcing buyers and sellers from showing up at the traditional daily auctions. However, it is also said the fear surrounding the plague led to the intense speculative behavior that drove up prices.
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 each time any asset climbs beyond its intrinsic value. The comparison is used even more frequently when the intrinsic value of the asset is called into question.
The dot com bubble was compared to Tulip Mania, and more recent Bitcoin and cryptocurrencies. Nout Wellink, the former president of the Dutch Central Bank, home of Tulip Mania, called Bitcoin “worse than Tulip Mania” back in December 2013.
“At least then you got a tulip, now you get nothing,” he explained. Because Bitcoin is backed by a decentralized, distributed cryptographic ledger and lacks a physical presence, pundits struggle to see the asset’s intrinsic value.
Several different models have been designed to help give BTC a fair market value, but the results are inconclusive and more evidence is needed. For example, the once-famous stock-to-flow model projected prices of well over $100,000 Bitcoin at a time when the top cryptocurrency traded at under $20,000.
When Bitcoin reached $20,000 for the first time in late 2017, the intrinsic value became wildly disconnected from reality and thus the bubble popped. The fact that Bitcoin went on to establish new all-time high shows that it’s more than just a bubble and that the world continues to see its intrinsic value – even if others might not.
The truth is that Bitcoin has bubbled up not once, nor twice, but a total of four times in the past, and it could very well do it again. The next time that investors speculation appears to get out of hand and BTC pushes far beyond its intrinsic value, it will be time to sell because the bubble is about to burst once again.
As a parting thought, if investors can go through periods of extreme speculative behavior that leads to bubbles, can the same extremes create what is essentially a reverse bubble of falling prices? And with sentiment more bearish than in any other time in history, is this reverse bubble in Bitcoin starting to burst?
There is a lot to learn from the history of past bubbles, starting with the first.
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— Tony "The Bull" (@tonythebullBTC) February 3, 2023
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