Today I want to tell you a story about Holland in the 17th century.
Yes, you read that right.
I realise you are probably thinking: woman, I came here to read about finance, not get a bloody history lesson.
But stick with me, we are going to revisit history to see if we can learn a lesson about the present.
During the 1600s, tulips were the hottest thing to hit Holland since designer clogs.
People were going crazy for them.
This was a prosperous period in Holland’s history, so it wasn’t just the super wealthy who were trading. Merchants, middle-class artisans and tradesmen suddenly found that they had spare cash to blow on pretty flowers.
Everyone wanted a piece of the action. And this drove up the price of tulips.
In 1623, one guy offered 12,000 guilders (this was more than the value of a house in Amsterdam) for 10 bulbs of the beautiful, and extremely rare, Semper Augustus – the most coveted tulip variety. Apparently, it was not enough to secure a deal.
So, by the 1630s (I guess after word got out that people were trying to buy 10 tulips for the price of a house), more and more speculators had piled in to the market. As people heard stories of friends or family making unheard-of profits simply by buying and selling tulip bulbs, they decided to get in on the act – and prices skyrocketed.
‘Get rich quick’ really is a tale as old as time.
Tulip mania hit its peak in 1636. By then, thousands of middle-class people, including cobblers, carpenters, bricklayers and woodcutters, were involved in the frenzied trading.
And then, pretty much overnight, the trading stopped. The market for tulips collapsed. This was because most speculators could no longer afford to purchase even the cheapest bulbs. Demand disappeared, and flowers tumbled to a tenth of their former values. The result was financial catastrophe for many.
This tale of tulip mania is often cited as the earliest example of an economic bubble. And as we all know, at some point, bubbles burst.
Now let’s fast forward to our present-day example.
Alan Kohler has written an excellent article on cryptocurrencies such as Bitcoin called Cryptothings are a big bet on our digital future, as buyers predict a brave new world ahead.
It’s a great read if you are interested.
I won’t recap it here, with this exception – in the article, Alan questions the question ‘does Bitcoin mirror that of tulip mania?‘.
I will leave that with you to decide.