What Is Tulipmania?
Tulipmania is the story of a major commodity bubble, which took place in the 17th century as Dutch investors began to madly purchase tulips, pushing their prices to unprecedented highs.
- Tulipmania is the story of a speculative bubble, which took place in the 17th century when Dutch investors purchased tulips, pushing their prices to unprecedented highs.
- During Tulipmania, the average price of a single flower exceeded the annual income of a skilled worker and cost more than some houses at the time.
- The example of Tulipmania is now used as a parable for other speculative assets, such as cryptocurrencies or dot-com stocks.
- Tulipmania reflects the general cycle of a bubble, from the irrational biases and group mentalities that push prices of an asset to an unsustainable level, to the eventual collapse of those inflated prices.
- Some historians have argued that the real tulip bubble was quite small, but exaggerated by later retellings.
Tulips first arrived in Western Europe in the late 1500s and became a fashionable status symbol for wealthy Dutch merchants. Certain bulbs were found to grow with unpredictable "broken" colors, which were highly prized due to their rarity.
As cultivation techniques improved, more people began collecting and speculating on tulip bulbs. Eventually, even stock traders joined the game, pushing the average price of a single flower to the point where it exceeded the annual income of a skilled worker and cost more than some houses at the time. Eventually, prices peaked, and then drastically collapsed over the course of a week, causing many tulip hoarders to lose their fortunes.
Tulipmania (also known as the Dutch tulip bulb market bubble) is a model for the general cycle of a financial bubble:
- Investors lose track of rational expectations.
- Psychological biases lead to a massive upswing in the price of an asset or sector.
- A positive-feedback cycle continues to inflate prices.
- Investors realize that they are holding an irrationally priced asset.
- Prices collapse due to a massive sell-off, and an overwhelming majority go bankrupt.
Did Tulipmania Really Exist?
Some historians have cast doubt on the historicity of tulipmania, suggesting that popular accounts may have fabricated or exaggerated the real event. Anne Goldgar, a historian at King's College London, found that "there weren't that many people involved and the economic repercussions were pretty minor." Had there really been a tulip-based economic collapse, there would have been much larger ripple effects in the wider economy. Instead, Goldgar "couldn't find anyone that went bankrupt."
An alternative explanation is that the size of the bubble was inflated by Dutch Calvinists, who frowned on the profiteering of the Amsterdam stock market and viewed the tulip bubble as a warning against capitalistic excess.
Some experts believe that tulipmania was more myth than fact. While there was a speculative bubble in tulips, the size of the economic disaster has been greatly exaggerated, according to historians.
Financial Bubbles Today
Tulipmania is frequently used as a metaphor for other speculative bubbles, particularly when the subject of the bubble has no clear economic value. Similar cycles have been observed in the price of Beanie Babies, baseball cards, non-fungible tokens (NFTs), and shipping stocks.
A notable parallel occurred during the dotcom bubble of the early 2000s when investors poured money into the tech sector. Due to the mysterious and poorly understood promise of the Internet, these investors found themselves putting money into companies with no revenue stream and no clear business model.
Another example is the derivatives bubble that preceded the global financial crisis of 2008. Due to the complexity of the derivatives markets, hedge funds and banks underestimated their risk exposure, causing the market to collapse when the underlying debts defaulted.
Why Did Tulipmania Not Create a Recession?
Some historians believe that the popular accounts of tulipmania were exaggerated by later retellings and that the actual extent of tulip speculation was much more limited than originally believed. This would explain why the bubble did not create larger ripple effects.
How Did Foreign Trade Impact Tulipmania?
Tulips first arrived in the Netherlands from Turkey in the 1500s. If the Netherlands had not had such a robust trading economy, it is unlikely that the small flowers would have had such a large economic impact.
How Does Tulipmania Relate to Bitcoin?
The bitcoin market is frequently compared with tulipmania, in that both prompted highly speculative prices for a product with little clear utility. Bitcoin prices tend to crash after significant gains, exhibiting many signs of a classic bubble.
What Happened to the Tulips After Tulipmania?
After tulip prices peaked in February of 1637, the price rapidly crashed back to pre-bubble prices. By May of that year, tulips were again trading at normal prices.