In 17 century Dutch aristocrats were willing to pay a price of an upscale house for a single tulip bulb. Why? The first price bubble in history explained by the BTCMEX Blog!

It was in Holland where 400 years ago the extraordinary effect of the collective mind on the market, which led to the first economic bubble in history. To the Dutch, the 17 century is known as the Golden Age. The tiny republic of the United Netherlands started the joint-stock company, invented the modern stock exchange, and dominated the global trade. 

The Nobels started consuming all the exotic products that were brought into the country. One of the products was a tulip, which very soon became the symbol of the Golden Age. Why was it a tulip, and how did a flower create the economic mania? 

Because of their nature tulips are very difficult to breed. It took about a decade for a seed to grow into a flower. Every year the flower blossoms the bulb clones can be made, but tulips only blossom only for a few weeks between March and May, so the plant can be moved safely in the form of a bulb only between June to September to be planted in autumn and blossom again in spring. Because of this, the flower can only be exchanged between people during limited time within a year. 

The main factor that created the mania was that some tulips were unusual. Instead of being one uniform color, some flowers showed distinctive stripes, caused by the tulip breaking virus. Because the marked flowers were rare they became an ultimate status symbol. People were willing to trade rare infected flowers, which created instant market demand. 

The price was pushed up very quickly. But what people were actually buying was not the flower itself but the future sale of the tulip – a derivative bought at an agreed price but delivered later. In case of tulips when the bulb was ready to be moved. People started selling tulip futures until it became an object of speculation. Traders stopped caring about the flower itself, only willing to make a profit from its future price. The price was pushed further until there was no one to pay a higher price for it. The confidence in the future profitable sales disappeared, and the price dropped back to the natural price level. People started having doubts if tulips were a wise investment. In February 1637 the flower market collapsed. 

Many claim today that the pioneering cryptocurrency – Bitcoin – is the tulip bubble of 21 century. Here are several arguments about why it is not. 

Tulips actually had no inherent value, being nothing more but just beautiful flowers. Bitcoin founded an entirely new method of transactions on a blockchain, powering new decentralized app platforms that all of us are using and will be using in the future. Still not convinced. Let’s look at WeChat as an example. The decentralized platform used by 890 million people in China and greater Asia, combines Paypal, Slack, Stash, Viber, Facebook, Twitter, eBay, Instagram, Priceline,… in one app.

Crypto is volatile and can lose value overnight. This argument tells us absolutely nothing, as nothing is immune and anything can go to zero overnight! Look at stock market crashes in the 20s, 80s, 90s. But while everyone else is worried about price swings, traders love it. They know that downward spirals are new opportunities. The Bitcoin long-term trend is up, even despite the crazy swings.

It’s backed by nothing? Nothing has any inherent value except the value we put in it. Even gold and diamonds are just market-driven goods with no real value and barely any utility. USD is backed by the US government. Sure, but what’s that really worth in a serious crisis? Who guarantees it won’t repeat the hyperinflation scenario witnessed in Venezuela or Zimbabwe recently? 

We trust the trust, but trust is a moving concept. It’s true that USD has inherent power as a store of value and a means of transacting business. It’s also true that Bitcoin and other cryptos are now more and more valuable every day as they fund companies through ICOs and through the thousands of decentralized apps that companies are building for them right now. Tomorrow they’ll be even more valuable because they’ll power voting, gaming, issuance of shares, and even security and reputation banks.

For some, it’s hard to see it right now, because the industry is young and emerging, but soon enough it will be a third-world economy and then a second-world economy and then a first-world economy.