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Is Bitcoin like the Tulip Mania?

Some say that Bitcoin is bubble, just like the Tulip Mania in the 17th century.

Is Bitcoin really following the history of Tulip?

You may already know the history of Bitcoin as these are very recent events.

In this column, let’s look into the tulip mania.

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Tulip caused the first economic bubble

Market bubbles occur from time to time – it’s just the way the markets work, but did you know that the first economic bubble on record was in the 17th century and was centered at tulips?

Yes, we are talking about the flowers, pretty flowers, granted, but it’s hard to believe that they can turn into an investment and that its price would soar to unbelievable heights.

Yet, this is exactly what happened in 1637 or so in the Netherlands, at least according to some accounts. It all started in about 1554, when the first tulip seeds were, according to estimations, sent to Vienna by Ogier de Busbecq, the ambassador of Ferdinand I, from the Ottoman Empire.

Quite quickly, tulip bulbs were shipped all across Europe and its popularity soared.

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Tulip was seen as a status symbol

It reached Netherlands in the right time, the Dutch Golden Age.

Amsterdam merchants were at the heart of the East Indies trade, at times making a profit of 400% in a single journey.

They had money to spend and tulips were viewed as luxury item and a status symbol.

What happened next? You can probably guess.

As the popularity of tulips expanded (AKA demand), the price of tulip bulbs rose.

Maybe that’s not the right term – it’s skyrocketed.

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CFD the wind trade (futures market)

The Dutch, already leaders in the field of modern finance, created a special market for tulip bulbs.

Professional growers paid increasingly more for the type of bulbs that were deemed most desirable, pushing prices higher.

By 1634, speculators discovered the market and by November 1636 any type of tulip bulb could be sold for hundreds of guilders.

That same year, the Dutch created a formal futures market where people could buy and sell contracts to buy bulbs at the end of the season.

Buyers paid a fee of 2.5% (or up to three guilders) for each trade.

Interestingly enough, this was called “wind trade”, since no actual bulb actually changed hands.

Sounds familiar?

It’s very much like the CFD trading offered by online brokers.

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Tulip bubble collapsed in 1637

By 1636 tulip bulbs became the Netherlands’ fourth top export product (following, if you care, cheese, herrings and gin).

Speculation in tulip futures pushed prices higher as people made – and lost – huge sums of money in several hours.

At the peak of the Tulip Mania during the winter of 1636–37, certain bulbs were changing hands ten times in a single day.

A single tulip bulb could fetch 10 times the annual salary of a skilled craftsman, or more.

Some people made a fortune. Others lost everything they had.

Then, in February 1637, contract prices instantly collapsed.

Why did it collapse? Some blame the bubonic plague, which prevented buyers from coming to auctions.

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What to learn from the past “Economic Bubbles”?

Of course, due to the limited and questionable economic data from the 1630s, a lot of this story remains uncertain and a source of debate among modern economists.

However, even as some claim that the event was exaggerated and cannot be considered a legitimate “bubble”, the story had inspired a lot of discussion and theories.

What is the lesson for modern traders?

Watch out for economic bubbles and make sure that you use information, analysis and reason when you make investment decisions.

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