What was Tulipomania? Is Bitcoin A Bubble?

What was Tulipomania? Is Bitcoin A Bubble?

Tulipomania (Tulip Fever) is considered by many to be the first financial bubble in history, which supposedly occurred in the early 1600s. Before we discuss whether Tulipomania was really a financial bubble or not, let's dive into the more common narratives that consider this event a real chance.

The Tulipomania Bubble

Tulipomania took place in Holland, during the Dutch Golden Age. The country had the highest per capita income in the world at that time, thanks to its expanding foreign trade and extensive international trade.

The economic boom has helped many people reach their goal of riqueza and prosperity, which gave life to the markets of luxury goods. In this context, one of the most desired items were tulips, particularly those with genetic mutations that made them prettier than usual. These unique flowers were very different from the other options available, so everyone wanted to display them as a status symbol due to their rare beauty.

What was Tulipomania? Is Bitcoin A Bubble?

Depending on the variety, the price of flowers could exceed the wages of some workers and in some cases even the price of a house. Furthermore, the futures markets increased the price, as it was no longer necessary to have the flowers on hand to trade.

However, with more and more farmers growing flowers, the supply turned out to be very high and the tulip market reached its peak in February 1637. There was a sudden lack of buyers and after a failed auction attempt in Harlem, fear and fear panic spread, causing the bubble to burst within days.

Historians are not sure whether the bankruptcies of the time were due to Tulipomania, as it is difficult to obtain financial records from this period. But there were certainly significant losses for investors with contracts related to Tulipomania. But what does this have to do with the Bitcoin?

Tulipomania vs. Bitcoin

Tulipomania was considered by many to be a perfect example of the financial bubble and what a person's burst can cause. The popular narrative describes a moment of greed and euphoria that caused prices to rise far beyond what was reasonable.

While the more experienced ones left early, the latter began to sell in a panic as soon as prices began to fall, causing large capital losses to various investors and service providers involved in the market.

 

 

It is very common to hear that Bitcoin and others Crypto are following a similar pattern. However, the financial world is very different and with many more players than in the XNUMXth century, so connecting Tulipomania to Bitcoin doesn't make much sense. Furthermore, Cryptocurrencies and traditional markets are quite distinct in many other respects.

Main differences

One of the biggest differences between Tulipa and Bitcoin is the potential to act as a store of value. The tulip had a limited shelf life and it was almost impossible to tell the exact variety or appearance the flower would have just by looking at its seed. Merchants would have to plant it and hope to have the exact type they wanted, especially if they had paid for one of the rare colors.

Other than that, if they wanted to transfer the tulips, they needed a way to safely transport them to their destination, with all the associated costs. Tulips were also unsuitable for payment because you couldn't break them up into smaller pieces, as this would likely kill them.

In addition, they could easily be stolen from the fields or off a market shelf, making them more difficult to protect.

In contrast, Bitcoin is digital and can be transferred within a global network. peer-to-peer (P2P). It's a kind of money digitally protected by encrypted evidence, making it highly resistant to fraud. Bitcoin cannot be copied or destroyed and is easily split into several smaller units.

Furthermore, it is relatively scarce, with a fixed supply limited to a maximum of 21 million units. It's true that the world of Cryptocurrencies presents some risks, but taking basic security precautions will likely keep your funds safe.

Tulipomania Was Really A Bubble

In 2006, economist Earl A. Thompson wrote an article called “Tulipomania”: Fact or Artifact?” where he discusses how Tulipomania was directly related to government—the orchestrated conversion of futures contracts into options contracts—and not as a market euphoria.

According to Thompson, the Tulipomania episode cannot be considered a bubble because “bubbles require the existence of mutually agreed prices that exceed fundamental values”, which was not really the case.

In 2007, Anne Goldgar published a book titled “Tulipomania”: Money, Honor, and Knowledge in the Dutch Golden Age”, in which she presents much evidence that the popular history of Tulipomania is full of myths.

Based on extensive archival research, Goldgar's arguments indicate that both the rise and explosion of the tulipomania bubble were much smaller than most of us tend to believe. She claims that the repercussions economical were very small and the number of people involved in the tulipomania market was quite limited.

Conclusion

Regardless of whether Tulipomania was a financial bubble, it is irrational to compare flowers with Bitcoin (or any other cryptographic currency). The event took place nearly 400 years ago, in a completely different historical context, and the flowers cannot be compared to a digital currency secured by advanced encryption.

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