Unlike dollar bills, gold bars or your friend’s mint-condition Beanie Babies, bitcoin is a decentralized digital currency that doesn’t exist in any tangible form.
In essence it’s a virtual currency not unlike the digital currency one might use to get virtual goods or services in online games such as Farmville.
But bitcoin isn’t a game — it’s a multi-billion-dollar business. Transactions are anonymous, supposedly untraceable, and irreversible. Recently the digital currency has been in the news because of questions about its stability.
A recent article in Time magazine noted that the “volatile rise-and-fall of Bitcoin has prompted lots of stories explaining why the online virtual currency is a classic bubble. Many compare it to tulip mania in 17th century Holland, where prices of rare tulip bulbs soared to absurd heights and then crashed.”
What does a uniquely 21st century electronic currency have to do with tulips in 1630s Holland? What, exactly, happened? Here’s a primer.
The country of Holland has long been known around the world for its amazing flowers — especially the prized tulip. To this day, the flower and the country remain closely associated, not just because they are grown there but also because of a craze in the mid-1630s (known as tulpenwoede) during which various varieties of tulips sold for outrageous sums. The craze was fed — as many crazes are — not by any particular aesthetic appreciation for the lovely flower but instead by greed.
Tulips had always been fashionable, but by 1634 they became especially popular and prices rose. Charles MacKay, in his book Extraordinary Delusions and the Madness of Crowds, notes that “In 1634 the rage among the Dutch to possess them was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked on the tulip trade.”
Investors who saw the prices skyrocket before their eyes assumed they would continue to do so. Indeed, they could easily double or triple their investment by merely holding on to their stocks. And those who could afford it — and many assumed they could, given what their current tulips were worth — bought more and more tulips.
Often the tulips themselves were never even seen and were still in the ground. (Unlike bitcoin, of course, they had the potential to actually exist.) The tulip craze snowballed, attracting ever-higher prices and ever more investors wanting a piece of the action.
Like the investment and housing bubbles that would surface — and burst in their investors’ faces — centuries later, the craze didn’t last. In the last few months of 1637, a few investors began to sober up, concerned that the high prices could not be sustained. They cashed out their stocks, and soon others did the same; within weeks the tulpenwoede collapsed like a house of cards.
The prices plummeted so quickly that tulips bought one day and delivered the next would be refused on the grounds that they were now worth 1/3 less than what they paid for them the previous day.
Panicked investors, from noblemen to farmers, who had invested their life’s fortunes in tulips were left holding stores of tulips that were now worth a fraction of what they paid — if they could find a buyer. Many were financially ruined, and the whole fiasco became an infamous textbook case of investment speculation gone awry.
Just how severe the tulip mania actually was is open to debate. One economist, Peter Garber writing in the Journal of Political Economy, researched the episode in the late 1980s and concluded that while the basic story was true, the breadth and depth of the panic and economic devastation had been exaggerated over the centuries. It was bad, but it wasn’t quite as dramatic as often claimed.
Nonetheless, the tulip mania craze holds important lessons for economists and sociologists — and maybe bitcoin investors as well.
Photo: Getty Images