📍 Austin, TX, USA. on 9th Jun 2022 at 00:00
5 mins read
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What do tulip bulbs and cryptocurrencies have in common? Nothing, really. However, bitcoin has been compared to what’s known as “Tulipmania,” a brief period in history where the Dutch supposedly lost their minds over tulip bulbs and subsequently created an artificial financial flower bubble that burst and ruined their economy.
In the early 1600s a new flower, the tulip, was imported from Turkey and quickly became highly sought after. In 1634 the price of tulip bulbs soared as Dutch mayors began buying bulbs and reselling them before they were even harvested. As the story goes, everyone in the Netherlands and nobility across Europe were mad at the exotic new flowers. It is said that some people borrowed extreme sums of money to purchase bulbs and resell them before they were even dug out of the ground to sell to eager buyers, especially the Germans.
As bad luck would have it the Germans lost a battle to the Swedes, German peasants began to revolt and the princes began digging up their own bulbs to sell to finance their lavish way of life causing a glut in the tulip market. Tulip bulb prices plummeted and Dutch mayors started losing money because the tulip trade was conducted through futures contracts. By 1637 the tulip bubble supposedly burst, many lost all their money and the Dutch economy was ruined.
The reality is, that not everyone in the Netherlands was buying options on tulip bulbs. It is unlikely anyone but the wealthy were spending any money on them and most could afford to lose that money. The commoners were too busy scratching out enough to live on day to day and would have had no access to loans to purchase tulip bulbs nor the means to store and distribute them. The tulip bubble was contained to hype amongst the upper class, the only ones who could afford to indulge in so-called “Tulipmania,” and the Dutch economy was largely unaffected when tulip bulb prices dropped dramatically.
Ramani Ramachandran CEO & Co-founder of Router Protocol offers his take on the comparison between cryptocurrency markets and tulip bulbs in the 17th century.
“A bubble blows up when speculative hype gets very far ahead of reality but typically a lot of the real innovative work gets done in the few years after the big bubble bursts. Bubble bursts, inefficiently allocated capital gets reallocated! Arguably the “Tulipmania” also coincided with a time of great economic progress for the Dutch at the height of their global prowess.”
From that perspective, the only thing tulipmania and cryptocurrencies have in common is they were both hyped by sensational headlines not based on reality.
According to David Cullinan with EQIBank the comparison between the Dutch Tulipmania and the volatile cryptocurrency market has been made many times but there really is no comparison. He pointed out that tulips are a perishable good with a short lifespan and have nothing to do with a technology created using already established technologies. The only thing tulips and cryptos have in common is not every bulb will bloom, just as not every cryptocurrency project will survive. This can be said of every business, some will succeed, many will fail. Unlike a bum bulb or a failed business the technology that created a cryptocurrency remains. Cullinan says crypto is best compared to the early days of the internet.
“Not every cryptocurrency or the project it is attached to will survive. Not every new business succeeds, nor do all new ideas; however, the underlying technologies and their impact will last for generations. To truly understand the value of the change that decentralization will introduce to our lives, we can look at how much the internet impacted our everyday lives in the last four decades and multiply it since innovation is happening so much faster these days." David Cullinan
Unlike cryptocurrencies, tulips are a commodity like oil and gas. Commodities are all based on supply and demand and their price for them fluctuates accordingly. They are not tightly controlled and their price is influenced by how many suppliers are on the market and the volume of production-related to the demand for the commodity.
“Cryptocurrencies are different from commodities. They deal with money supply just like real money that the Fed deals with and the treasury prints. The money supply is different from commodities for the sheer fact that it can be added to or subtracted but it has only a certain circulation at any given time and the federal reserve banks of the world manage it pretty tightly.
Corn, a commodity, for example, can be produced massively and forever. Bitcoin cannot, there is only so much Bitcoin that can and will ever be produced - this makes it more like money and honestly, more valuable than federally controlled dollars because the treasury will be able to print more dollars which will lead to devaluation and inflation. This won't happen with Bitcoin because there is only a set amount that can be mined. Once it is all mined, that's it forever - which will make it more valuable than money in my opinion and more stable than real dollars.”
If you look hard enough you might find a few things that the 17th-century tulip bulb market and today’s cryptocurrency market have in common but a big difference to keep in mind is during “Tulipmania” only the wealthy could participate. Cryptocurrencies can be purchased and traded by everybody regardless of their noble heritage or financial status. As the world slowly begins to adopt cryptos as a legitimate currency they will have a much bigger impact on the global economy than some flowers that enjoyed a brief period of over-hyped popularity.