In the 17th century, the small yet influential country of northern Europe known as the Netherlands was living its golden age; from acquiring a sizable empire and inventing the modern stock exchange to successfully building the first joint stock company, the so-called Dutch East India Company. Amidst this flourishing historical moment, the brightly coloured flower that would come to be known as the country’s symbol, the Tulip, was introduced by Dutch merchants and brought back to the Netherlands from the Ottoman Empire.
Soon enough the Tulip and its bulbs climbed the ranks of commodities, establishing itself as the ultimate status symbol coveted by the affluent and the influential. The market witnessed the emergence of tulip traders and middlemen all looking to make a profit from the tulip trade which quickly evolved into something more sophisticated and riskier. A craze which quickly spread to every corner of Dutch society was sparked by rumours of exorbitant tulip bulb prices in cities like Paris, drawing in a lot of new and unskilled dealers to the market. Among these newcomers and amateurs were weavers, spinners, cobblers, bakers, grocers and peasants who were trying to make a profit from the hot new commodity.
One of the elements that promoted the increase of the tulip market volatility was the introduction of ‘futures contracts’ which allowed buyers to guarantee to pay for bulbs at the end of the growing season. However, the extravagant prices were not based on the tulips’ intrinsic value but on the speculation about their future worth and their anticipated value. Despite the difficulties that came up with tulip harvesting, such as their slow growth and restricted blossoming time, solid-coloured tulips remained affordable.
What truly captivated the upper echelons of Dutch society were tulips characterised by a flame-like striping known as Semper Augustus. They were just as rare as they were unusual. The new and exciting varieties of patterns in high demand and in short supply contributed to soaring prices reaching values as high as a grand canal house in Amsterdam. Thus, the Dutch Republic observed the emergence of an unprecedented occurrence: a market driven exclusively by speculation where prices soared beyond reason.
As the tulip mania swept throughout various social classes, the only two significant groups that could have stabilised the market were absent. The first one, the wealthy tulip collectors who had previously been prepared to shell out hefty sums for rarer types of tulips, stopped purchasing and exited the market as costs soared beyond reason. Meanwhile, the second one, composed of Amsterdam’s wealthy merchants to whom tulips weren’t a significant investment but merely a status symbol, preferred putting their money into companies’ stocks, real estate or financial products like bills of exchange. The absence of these crucial groups eliminated a pivotal stabilising factor required by the market.
The market, oversaturated to the breaking point with speculation, finally reached its culmination with the realisation that tulips were, after all, just flowers and there was no real shortage.
The confidence that had once sustained the market’s high levels started to erode, as well as prices that had previously seemed certain to climb started to weaken.
In 1637 auctions began to falter as purchasers became unwilling to part with outrageous sums of money for bulbs they might never see. Bulb contracts quickly began to lose value and the bubble that had taken years to grow burst in a matter of days.
The aftermath was severe for those who witnessed their wealth vanish but the Dutch economy demonstrated resilience, absorbing much of the impact.
The collapse had little effect on wealthy merchants who were the foundation of the Dutch economy whereas market participants from lower socioeconomic strata were not as fortunate. When the market crashed, those who had sold their possessions or taken out mortgages on their homes to invest in tulips suffered irreversible losses. The economic tribulation faced by the lower economic class came to a halt in May 1638 when the Dutch government stepped in and proclaimed that tulip contracts could be annulled upon a payment of 3.5% of the agreed price, allowing many to free themselves from amounting debts.
The Tulip Mania serves as a warning against excessive speculation and market volatility, the reverberations of which can be loud and clear in financial bubbles throughout history to date, including the most recent volatility in Bitcoin and NFT bubbles. These events serve as a reminder that despite changes in market participants and assets, the underlying human motivations remain unchanged.
The rise of Bitcoin and the broader cryptocurrency market can be looked to as an example. The novel concept of Bitcoin as a decentralised currency which promised to revolutionise finance by offering a real alternative to the traditional banking system had genuine intrinsic value. However, as its notoriety grew so did its speculative interest leading to investors pouring astounding sums of money into Bitcoin, not necessarily because they believed in its long-term value as a commodity, but simply in the hopes of profiting from its skyrocketing prices.
At the end of 2017, Bitcoin had reached its all-time high with every coin being worth more than $20,000 but this staggering price was largely the result of speculative buying by investors. This rise in Bitcoin prices, far beyond their intrinsic worth, was strikingly reminiscent to that of Tulips in 17th century Netherlands. Since then, Bitcoin’s value has experienced a high degree of volatility but its story is still unfolding, making it hard to predict the future of the decentralised currency.
Similarly, the rise of non-fungible tokens (NFTs) in 2021 bore striking similarities to the Tulip Mania. NFTs are non-interchangeable digital assets representing ownership of unique items in the form of digital art, music, videos, collectibles and other forms of media. Much like rare flame-like striped tulips, NFT prices surged in a matter of months, with some selling for millions of dollars. The most expensive to date being the NFT artwork “The Merge” by digital artist PAK, being sold for $91.8 millions in the form of 266,445 shares bought by 28,983 collectors. Nonetheless, the astronomical prices witnessed led many to question whether the market was being driven by speculation rather than the prices being an accurate representation of the actual value of the asset being sold. These modern examples illustrate that, despite the four-century difference, human psychology and market dynamics have not changed significantly.
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