On Tulips and Bitcoin: Financial Bubbles Then and Now

The more I hear Bitcoin discussed in everyday conversation as I'm standing in line at the store, the more I am convinced we've gotten ourselves stuck in a crazy time machine and have been plunked down onto the streets of Amsterdam in the 17th century.

In the late 1600s, what began as a gentlemanly hobby of trading rare tulip bulbs turned into a full financial market filled with buyers and sellers and speculators driving the prices of tulip bulbs to extraordinary heights. From this historical perspective on "Tulip mania" from BBC, we read:

As people heard stories of acquaintances making unheard-of profits simply by buying and selling tulip bulbs, they decided to get in on the act – and prices skyrocketed. In 1633, a single bulb of Semper Augustus was already worth an astonishing 5,500 guilders. By the first month of 1637, this had almost doubled, to 10,000 guilders. Dash puts this sum in context: “It was enough to feed, clothe and house a whole Dutch family for half a lifetime, or sufficient to purchase one of the grandest homes on the most fashionable canal in Amsterdam for cash, complete with a coach house and an 80-ft (25-m) garden – and this at a time when homes in that city were as expensive as property anywhere in the world.”

Everyone got in on the act. First the gentlemen connoisseurs but later the average Joe. We read on:

Things came to a head during the winter of 1636-37, when tulip mania reached its peak. By then, thousands of people within the United Provinces, including cobblers, carpenters, bricklayers and woodcutters, were indulging in frenzied trading, which often took place in smoky tavern backrooms. (Drink was a significant factor in the generally intoxicated mood.) Some bulbs even changed hands up to 10 times during the course of a single day.

And then, overnight, the tavern trade disappeared. In early February 1637, 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 the prospect of financial catastrophe for many. Disputes over debts rumbled on for years.

Today we have Bitcoin. And what started as a very niche market for the financially tech savvy has now blossomed into a household-level investment. Standing behind me in line at the mall I could hear one man explain to his friend how much money someone made in Bitcoin, and that this profit can be repeated if they get in to Bitcoin themselves. Soon.

One Bitcoin is now trading at over $13,000, which is up from about $1,000 a year ago. And while it has backed off from its recent highs, it's still a substantial win for anyone who got in early.

But like the tulip bubble of the 17th century, someone may be left holding the proverbial bag. The financial experts are issuing warnings. Goldman Sachs has described the "crypto-currency boom" as an example of "speculative behavior," and others agree:

Goldman isn’t the only firm to send up a warning flag about cryptocurrencies. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon labeled bitcoin a “fraud.” Fed Chair Janet Yellen has said it is a “highly speculative asset,” and Bank of Japan Governor Haruhiko Kuroda said it’s being used for speculation. (Note that Goldman is also reportedly building a cryptocurrency trading desk.)

(read the full Bloomberg article here)

For discussion:

How are the tulip bubble and bitcoin similar? different?

Would you invest in bitcoin? Why or why not?