What Cryptos and Tulips Have in Common
As more of my clients proclaim both realized and unrealized gains in their cryptocurrency accounts, I had to reference a historical stock market reference from the early 1600s in Holland. With the popularity of cryptocurrency taking off and seemingly gaining more and more attention of the internet, it is hard to shield the FOMO (fear of missing out). As an advisor, I will admit that it is tough to please clients who expect 300-400% rates of return, and I sometimes wonder if I should jump into the craze in attempt to make a quick buck!
As I try to adapt to the modern age and take an educational approach to learning something new and sharpening my sword, I still can’t wrap my head around Cryptocurrency and revolution behind it. I guess I will be the contrarian, who only buys profitable companies that manufacture toothpaste, bodywash, and deodorant who retain earnings and offer a dividend.
After giving up on the inability to follow reasoning in the basis of crypto, here is my rationale for the “Cryptomania of 2021”, not to be confused with the “Tulipmania of the 1600s”:
Over the past 18 months, in the US alone, there were 335 million people stuck at home for at least a portion of the year
Cash (USD) amounts of roughly 391 billion¹ were direct deposited into bank accounts of low-middle income households
Excess unemployment benefits lifted unearned wages higher than most recipients’ previously earned income
Some unemployed weren’t required to make mortgage payments (mortgage forbearance)²
“The Great Resignation” amid other factors have led to the largest number of job openings of 10.9 million³
Federal student loan payments were (and are still) put into forbearance to give graduates more temporary disposable income
Robinhood and Coinbase Apps are the #1 and #2 downloaded apps of 2020-2021⁴
The collection of facts stems from online sources (which could be inaccurate for all I know) but also from my firsthand experience and network of clients, friends and family. To summarize: a record number of people were forced to be at home and stop working due to the COVID-19 pandemic, a record amount of cash stimulus hit their bank accounts, the bulk of household living expenses were put on hold or reduced for the better half of a year, and the number one app store purchase were Robinhood and Coinbase for the past two years. The stars align and we have Tulipmania 2021!
Amid all the frenzy, nobody thought that they were staking everything on a bit of greenery, which lacked any intrinsic value. Dealers refused to honor contracts, prices crashed, and people were left holding a lot of beautiful flowers that nobody wanted. Though the Dutch economy did not collapse, individuals who speculated and participated in the buying and trading became impoverished overnight.⁵
For those of you who do not know the story, The Corporate Finance Institute does a good job of summarizing the history:
The Dutch tulip bulb market bubble (or tulip mania) was a period in the Dutch Golden Age during which contract prices for some of the tulip bulbs reached extraordinarily high levels and then dramatically collapsed in February 1637; the rarest tulip bulbs traded for as much as six times the average person’s annual salary at the height of the market.
The tulip mania was one of the most famous market bubbles (or crashes) of all time and is generally considered more of a hitherto unknown socio-economic phenomenon than a significant economic crisis. Metaphorically, the term “tulip mania” is now often used to refer to any large economic bubble when asset prices deviate from intrinsic values.
Historically, the phenomenon did not critically influence the prosperity of the Dutch Republic, which was the world’s leading financial and economic power in the 17th century. The Dutch even recorded the highest per capita income in the world at that time.
History of the Dutch Tulip Bulb Market’s Bubble
Tulip bulbs, along with potatoes, peppers, tomatoes, and other vegetables, came to Europe in the 16th century and commanded the same exoticism that spices and oriental rugs did. The introduction of the tulip in Europe is usually attributed to Ogier de Busbecq, the ambassador of Ferdinand I, Holy Roman Emperor, to the Sultan of Turkey, who sent the first tulip bulbs and seeds to Vienna in 1554 from the Ottoman Empire.
Initially, tulips were a status item purchased for the very reason that they were expensive and were destined for the gardens of the affluent. It was deemed a proof of bad taste in any man of fortune to be without a collection of tulips. Following the affluent, the merchant middle classes of Dutch society sought to emulate their wealthier neighbors and demanded tulips too.
However, at the same time, tulips were considered to be notoriously fragile – they could scarcely be transplanted or even kept alive without careful cultivation. In the early 17th century, professional cultivators began to refine techniques to grow and produce the tulips locally, establishing a flourishing business sector that has persisted to this day.
In 1634, tulip mania swept through Holland. The obsession to possess tulip bulbs was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade. A single bulb of tulip cost as much as 4,000 to even 5,500 florins – which meant that the best of tulips cost more than $750,000 in today’s money.
By 1636, the demand went so high that regular marts for sale of tulips were established on the Stock Exchange of Amsterdam, and professional traders got in on the action. Everybody appeared to be minting money simply by possessing some of these rare bulbs. It seemed at the time that the price could only go up; that the rage for tulips would last forever. People began using margined derivatives contracts to buy more tulips than they could afford. However, as quickly as it began, confidence tumbled.
By February 1637, prices began to fall and never looked back. The sharp decline was driven by the fact that people initially purchased bulbs on credit, hoping to repay when they sold their bulbs for a profit. However, as prices began to decline, holders were forced to sell their bulbs at any price and to declare bankruptcy in the process. By 1638, tulip bulb prices were back to normal.
Amid all the frenzy, nobody thought that they were staking everything on a bit of greenery, which lacked any intrinsic value. Dealers refused to honor contracts, prices crashed, and people were left holding a lot of beautiful flowers that nobody wanted. Though the Dutch economy did not collapse, individuals who speculated and participated in the buying and trading became impoverished overnight.⁵
“Those who cannot remember the past are condemned to repeat it.” –George Santayana, The Life of Reason, 1905.
¹ - https://www.cnbc.com/2021/05/26/new-round-of-1400-stimulus-checks-brings-total-sent-to-391-billion.html
² - https://www.consumerfinance.gov/coronavirus/mortgage-forbearance-during-covid-19-what-know-what-do/
³ - https://www.reuters.com/business/us-job-openings-rise-record-109-million-july-2021-09-08/
⁴ - https://www.cnbc.com/2021/04/16/robinhood-and-coinbase-dominate-mobile-app-stores.html
⁵ - https://corporatefinanceinstitute.com/resources/knowledge/economics/dutch-tulip-bulb-market-bubble/
