Tulip mania, the first speculative bubble
There has been much debate in recent times about the appeal of cryptocurrencies. It appears everyone is getting in on what seems to be on the surface a wave of growth and profit. Yet there is this inescapable feeling overshadowing everything, that we’re waiting for the trap door to emerge followed by a torrent of loss and regret. This wouldn’t be the first-time people have been absorbed by a quick-win investment opportunity, eliciting a self-inflicted bubble likely to benefit just a few early adopters.
The origins of this type of investment hysteria can be traced back hundreds of years to the first recorded bubble, known today simply as tulip mania.
During the 17th century, formal futures markets appeared in the Dutch Republic with tulips proving to be one of the best performing commodities. Their arrival into Europe coincided with the beginning of a financially independent Holland, no longer known as the Spanish Netherlands. The tulips saturated and intense petal colours, unlike any flower seen in Europe at the time represented a new-found wealth for the region. Amsterdam merchants were quick to establish lucrative East Indies trade routes for the plants, with voyages yielding profits in excess of 400%.
The plants values rocketed, and by February 1637 some single tulip bulbs sold for more than 10 times the annual income of a skilled worker. Bulbs were changing hands up to 10 times a day, with bulbs rarely finding their way to buyers with ownership changing hands too quickly. Then at the end of February buyers failed to show at routine bulb auctions due to the outbreak of bubonic plague. With investment fear mounting, and product residing with suppliers longer than anticipated, prices collapsed abruptly grinding trade to a halt.
Tulips seemed to set the template for other plants to follow suit. Hyacinth’s were next to attract investment, offering high initial prices at the time of their introduction, then almost immediately falling. Investors showed little reticence by their losses and the markets continued to attract investment, similar to what we see today with cryptocurrencies.
We seem to learn little from our ancestors, and continue to invest in commodities yielding prices that deviate from intrinsic value. For now it seems, the principles of tulip mania will continue to thrive.