“It was once cool and learned to dismiss Bitcoin as a ‘Tulip Bubble,’” writes Allen Farrington and Steve Baker in a recent piece for CityAM. “We believe it will not be for much longer.”
It never should have been.
While I haven’t seen “tulip” references to bitcoin in a long while, I doubt the slander went away because the nocoiners learned the financial history I’m about to account—or because they listened to people like me harping on endlessly about the financial bubbles of the past 1.
Rather, the insult became boring: Somehow it didn’t hit enough when bitcoin, like a cockroach (hashtag The Economist) returns, over and over, and breaks past records—while it was already supposedly dead (477 times as of this writing, says Bitcoin Obituary). How rude.
By telling me that bitcoin is a bubble like tulips, you’re telling me three things:
- You don’t understand bitcoin
- You don’t understand bubbles 2
- You certainly don’t understand what happened in Amsterdam 1637.
Tulips in Amsterdam during the winter of that year were nothing like bubbles, if indeed such a thing even exists: If anything, the Netherlands is still a tulip powerhouse with some three-quarters of the global tulip market: If a “bubble” is a globally dominating industry some 400 years later, was it really a bubble…?
Also, no. Most histories, popular or punditry, about these bulb are false, hearsay, or exaggerated.
My favorite indicator for the tulip mania’s irrelevance was the discussion in the premier Dutch financial history source: A Financial History of the Netherlands, (a 1997 book by the obscure publisher Cambridge University Press3). Hundreds of pages of the financial intricacies of Netherlands’ history feature a single sentence about the tulip mania (unsupported, with erroneous price estimates).
It just isn’t a thing.
Here's a quick run-down:
- we have maybe 150 recorded price quotes across a dozen types of bulbs
- bulbs are in the frozen ground in winter when this supposed "bubble" bursts (Feb 1637) 4
- futures contracts, which these inevitably were, were not widely recognized or upheld by courts
- the mythology comes from lyrical writing in the 19th century (echoed, credulously, by economists who already hated financial markets)
- nobody was ever bankrupted by the "collapse" of tulip prices
Tulips were desirable and demanded as a fashion item among the well-off merchants of Amsterdam in the 1630s. A certain mosaic virus strain turned the bulbs into all manner of speckled colors—“broken bulbs,” with unique, multicolor patterns (google examples). That made tulips non-standard products, the vast majority of which never fetched any elevated prices. What was valuable with certain tulips were the particular shapes and patterns that an individual bulb had—characteristics that could genetically be passed on to the next generations of that bulb.
But since they were frozen in the ground during winter, any and all stories about bulbs trading for an Amsterdam canal-front house or a customer of a pub accidentally eating a million-dollar onion are imaginary.
This line from Peter Garber is enough for all of us to take our ball (bulbs?!) and go home:
“Typically, the buyer did not currently possess the cash to be delivered on the settlement date, and the seller did not currently possess the bulb.” (Garber, Famous First Bubbles: The Fundamentals of Early Manias)
or this, by Dutch historian Nicolaas Posthumus:
"for many, however, there was no loss at all; they had sold what they did not possess, to someone who lacked the means of paying them; these sales were all annulled." ("The Tulip Mania in Holland in the Years 1636 and 1637," Journal of Economic and Business History 1929)
So, OK. What we have are a hundred or so recorded prices (“prices”) for futures contracts (when such contracts where legally dubious or unenforceable) to non-standard bulbs during a few winters in the 1630s, massively exaggerated by Charles Mackay, a Scottish poet, two centuries later—and, like so many wrong things do, etch itself forever in the public consciousness.
The story of tulipmania is turtles on top of turtles on top of... nothing at all.
Anne Goldgar, whose book Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age is a great take-down of many Tulip-related myths, explains in an interview that tulips are a "byword for insanity in the markets.”
Whenever an asset increases in price, tulips have been readily available as a short-hand slang for STUPID PRICE. Invoking tulips them is usually a mistake: the Tulipmania of 1637 was more fiction than fact and financial observers from John Kenneth Galbraith to Charles Kindleberger have passed on poorly based moralistic stories from an elaborate game of Chinese whispers.
“I couldn’t find anybody that went bankrupt... those who lost money in the February crash did so only notionally… I found not a single bankrupt in these years who could be identified as someone dealt the fatal financial blow by tulip mania.” Goldgar, The Conversation
A surprisingly accurate Smithsonian article from a few years ago also spelled this out:
merchants really did engage in a frantic tulip trade, and they paid incredibly high prices for some bulbs. And when a number of buyers announced they couldn’t pay the high price previously agreed upon, the market did fall apart and cause a small crisis—but only because it undermined social expectations.
Tl;dr:
The Tulipmania was irrelevant, the trade on which the myth is founded mostly relegated to obscure and unenforceable contracts in taverns, contracts that involved not the entire Dutch republic but a few merchant afecionados. The evidence we have is spotty, and the story was popularized by a writer and prankster about two-hundred years later.
It's not primarily that bitcoin isn't like the tulipmania because it's not a bubble. It's that** the tulipmania is exaggerated fiction:** Bitcoin has absolutely nothing to do with this supposed financial bubble of the past.
That's today's little money lesson.
Peace,
J