Bitcoin Bubbles And Tulips

The recent rise of Bitcoin has often been referred to as just 'another tulip bubble', however I believe the parallel drawn is an unfair one and doesn't take into account some important differences between Bitcoin and tulips.

A Brief History Of Tulips

In early to mid 17th Century Europe, freed from the bonds of Spain, Holland was in the midst of an artistic and economic renaissance. Trading in a vast range of commodities, the Netherlands was seen as the place to be for entrepreneurs and businessmen alike.

around the early 1600s the Tulip was introduced to Europe via Holland. At the time the flower was quite different from any other floral offerings the Europeans were used to, and so as the tulip gained in popularity, prices rose with desire.

Holland, being the economic capital of the world at the time, had a thriving futures market, and so the Dutch authorities created tulip future contracts, and thus started tulipmania.

Separating Value And Price

Most things within an economic system that have value, are also hard to obtain, and indeed the many varieties of tulips that were being sold, were very difficult to cultivate. Some varieties could take up to 12 years to flower, and so their rarity was matched in their price.

However, in order for a commodity to be continually sold at a higher and higher price, there have to be people willing to buy at those prices.

Buyers will only carry on buying if they perceive value in their purchase, as with value comes a chance of returns on investment.

The problem with the tulip market, was that by the time prices reached astronomical heights (there were reports that in one trade just 40 bulbs were sold for one hundred times the cost of a ton of butter), the market was no longer controlled.

When the flowers were first introduced, only a small number of people controlled the market. Or indeed had the knowledge to cultivate them and produce more.

However with such a booming market, it was surely inevitable that people would learn to grow tulips themselves and get in on the action.

If tulips had had properties that restricted the number of people able to grow them, then the market would have continued and thrived.

A Short Case Of Purple

Oddly enough, we can prove our point using the colour purple. If you'll allow me a moments digression; have you ever wondered why you don't see the colour purple in any national flags? Or at least in nations that are more than say 100 years old.

This is because for most of human history, purple did not exist as a dye, or has been extremely difficult to produce.

For years the only way to make purple dye, was via a sea snail called the spiny dye-murex. Thus cloths dyed in purple were very expensive for many hundreds of years, and is why it was often associated with magic and nobility in many different cultures.

Back To Bitcoin

Bitcoin of course is finite and cannot be inflated with the production of any more. In that respect Bitcoin and cryptocurrency in general is more like purple than tulips.

Of course Bitcoin is better than a simple colouring or floral decoration. Because it serves a purpose beyond merely the cosmetic, Bitcoin and other cryptocurrencies are at once currency, and a means of storing, and representing value.

All trading is speculative, and market perception of value can rise and fall at any moment, however unlike a tulip bubble, rare and valued commodities tend not to suddenly crash in value.

This is why things like gold tend to cost the relative same amount today as it did hundreds of years ago.

Up Up And Away!

So in short, the rise and rise of Bitcoin is nothing like 17th Century tulipmania, there is simply more substance to it.

Will it keep going up and up forever? Who knows? All we can know is that the value will fluctuate along the way and for now those fluctuations are averaging the price ever upwards.

There will be winners and losers along the way, but whatever happens, Bitcoin will forever be seen as the opening shot in the cryptorevolution.

Further reading:

Tulip mania
History Of Purple
Spiny dye-murex

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