Tulipmania: When Flowers Cost More than Houses

The world's first financial bubble is a cautionary tale for investors

Imagine paying the same price for a flower as a mansion. This was the reality during the world’s first-ever financial bubble, Tulipmania.

Tulips were a symbol of wealth and prestige in 17th century Netherlands which caused demand to soar, earning fortunes for people from all sides of society, from wealthy merchants to unskilled workers.

Eventually, the bubble burst, leaving investors with nothing but dying flowers and empty pockets.

Bubbles continue to plague modern-day investors. As is often said, those who fail to learn from history are doomed to repeat it. It seems ridiculous today, but the tulipmania bubble is a cautionary tale for modern-day investors.

Tulipmania

Tulips were introduced when the country was experiencing a golden age driven by its global trade dominance, making it one of the planet's wealthiest and most advanced nations. With the invention of the Rolex still 300 years away, tulips quickly became a must-have item for the newly affluent Dutch merchant class desperate to flaunt their financial status.

Soon, everyone from wealthy merchants to chimney sweeps wanted to join the trend; people were willing to pay up to 6 times the average annual salary for the rarest types.

Tulip bulbs soon became available to trade on the stock exchange. They were seen as smart investments, given their potential to produce more tulips. This allowed gamblers, speculators and professional traders alike to buy bulbs on credit, hoping to repay their debts when they sold them at a higher price: an early form of margin trading and futures.

Sound risky?

Well, the rarest bulbs could fetch enough to buy a mansion on the most fashionable canal in Amsterdam, where real estate prices were among the highest in the world. Despite not trending on TikTok with teenagers standing in front of rental Lamborghinis, bulb trading soon became the next 'get rich quick’ scheme for the unsuspecting masses.

All sounds great, right? Not quite…

The bubble burst

The problem with trading on margin is when prices move unfavourably; people are forced to sell. Prices then decrease further and more people have to sell, causing a feedback loop of crashing prices and forced selling.

In February 1637, prices got so high that most buyers could no longer afford even the cheapest bulbs, causing demand to implode. Bulb producers found no customers left for their ever-growing supplies, and the market collapsed spectacularly without warning, sending prices plummeting by 90% in just a few days.

The crash was so fast and furious Vin Diesel would have been impressed. The result was financially catastrophic for many; people were forced to declare bankruptcy and debt disputes rumbled on for years.

Lessons learnt

Tulipmania serves as a prime example of how all financial bubbles unfold - prices soar, psychological FOMO (fear of missing out) sets in, and rationality goes out the window as everyone seems to be making a fortune; until the inevitable moment when the music stops, leaving most investors with worthless assets.

It's like a version of pass the parcel or musical chairs, where nobody wins except the wiser few who quit the game early.

Throughout history, financial bubbles have followed a similar pattern, with examples including the South Sea Bubble of the 1700s where investors like Isaac Newton were lured in by soaring stock prices that later collapsed, and the Dot-com Bubble of the late 90s and early 2000s which saw a race to invest in internet companies leading to unsustainable stock prices.

In a bubble, prices don't rise due to intrinsic value but because people expect to sell to someone else at a higher price. Most people buying bulbs weren't interested in sprucing up their gardens with new tulips; they wanted to profit.

The greater fool theory: belief you can profit buying an overvalued asset with the expectation that a greater fool will come along to buy it at an even higher price.

It might seem foolish to pay $1m for a tulip bulb, but if you can sell it to someone else for $2m, it’s a no-brainer. The greater fool theory is one of the most frequently used arguments against the likes of Bitcoin, crypto and NFTs today.

Is crypto another bubble?

There are signs of bubbles in crypto and NFTs, many of which have already burst, Bitcoin's price has crashed by over 80% several times, driven by margin-fuelled forced selling.

Conversely, if you bought Amazon stock during the dot-com bubble and held it until today, you made a very profitable investment. But most people didn't, and most people won't. So are we all just playing musical chairs? This begs the question, is crypto another tulipmania? If so, could Bitcoin be the Amazon of that bubble?

The Netherlands is the birthplace of the stock market, financial derivatives, and, consequently, the world's first financial bubble. Tulipmania is a cautionary tale for all of us. Despite every bubble following the same process, human emotion has driven us to repeat the same mistakes over and over for 400 years.

So the next time you admire a tulip, remember to always be on the lookout for FOMO.