A 17th-century fallacy that made tulips the highest valued assets.
Bubbles in financial markets are no alien to the world. Whether it’s the trillion-dollar Dotcom crash or the 2008 housing bubble, each new asset class that’s unnecessarily appreciated, proved only to be a disaster lately.
But if you’re thinking that such scams are a modern-day consequence of greed and faulty systems, then take hold. The history of fomo-driven assets getting unnecessary hype and then washing out investors’ wealth is much more ancient. So much so that it didn’t even involve any established asset by then. Now that such bubbles are in the news every day let’s first know what exactly a bubble is.
The bubble is nothing but a delicate soap formation filled up with air just to get burst when it can’t handle its own pressure.
Very similarly, financial bubbles are consequences of baseless assets being highly demanded regardless of their actual utility. That asset may be anything from a real estate property to a silly ape graphic bidding at enormously higher rates. The actual problem occurs when the prices of such vague assets go up and up without having any underlying intrinsic value.
The reason for such a price rise? Utter gambling by expecting the prices to further rise in future and selling it at higher profits. It’s when the demand crashes that the bubble seems to burst gradually. And slowly and steadily, the market runs out of potential buyers and the sellers are bound to lower their prices for making a profitable exit. This is what creates havoc in the market and then what happens is called a bubble burst.
Now cutting to the chase, one of the first-ever bubbles observed in the history of finance took place in the year 1636 in Dutch. Amidst a golden age for Dutch Republicans, Dutch was rapidly developing its financial systems, stock markets, business contracts and investments. On one side wherein it was enjoying its independence from Spain, a mishap was about to take place in Amsterdam, its Capital.
The Tulipmania…
Tracing back the tulip hype, it was the 16th century during which tulips gained popularity. It was originally produced in Person but eventually travelled to western Europe, all thanks to easy global trade. It came in various colours and patterns and gradually became a piece of attraction for newly turned Dutch middle-class society. Possession of a tulip was considered a status symbol to outshine others in society.
As silly as it may sound but this created a real hype for tulips by a recently turned rich community. So much so that they were ready to pay large sums of money for the latest and extraordinary shade of tulips.
On other hand, it was turning into an expensive and risky investment as an unknown virus has produced tulips with dark coloured stripes. This was one of the most expensive tulips of all. But the tulip cultivater couldn’t know what the tulip would turn out to be like. It was only after the cultivation, that one can know the exact colour and pattern of the tulip. Such a situation created a moment of a dilemma for tulip growers and that heavily affected tulip production.
Thus, an unhealthy demand-supply correlation downgraded the tulip industry and it was at its worst in no time. To sum it up, the flower bulb which once soared 200 times its actual price due to mad demands is now bankrupting the investors’ wealth after the bubble burst. To draw an analogy for recent times, Crypto assets are showing the same properties as tulips in the 17th century.
Tulipmania and Crypto markets. Is the history being repeated?
As recently quoted by the RBI Chief, the crypto markets are heading towards the fate of tulips. But how far does that stand true? Well comparing Cryptos with tulips doesn’t make sense in all aspects. The sudden hype is undoubtedly the same for both of them but the underlying technologies are ways apart.
Unlike tulips, Cryptocurrency is backed by blockchain technology and decentralised networks with real-world utility. This makes it a feasible investment option for parking the funds for the future. What outcasts the investment sentiments are the regulatory provisions which are not uniform across the globe. Each country’s government regulates crypto as per their discretion and this creates irregularities worldwide.
For instance, the RBI Governor warned investors to be careful after their investment in volatile crypto assets. He further added that as such assets have no underlying value, investors must invest at their own risks.
Overlooking the contradiction between investor sentiments and government statements on the Crypto markets, it won’t be untrue to completely deny that the history of tulipmania won’t be repeated. But still, only markets can show what lies ahead.