What is Tulip Mania first ?
Tulip Mania is the story of first ever recorded speculative bubble which wiped out wealth of scores of investors.
More than 300 years ago, during early 17th century, The Dutch economy was at its peak, and it was one of the advanced economic & financial powerhouse of the world.
During this period, the first ever speculative bubble or asset bubble was recorded. The period from 1634-37 saw extraordinarily high level of speculative trading of one commodity – Tulip Bulb. Yes, the Tulip flower !
It’s interesting to read about the mania written by Scottish journalist Charles Mackay in his book, “ Extraordinary Popular Delusions and the madness of crowds”, wherein he describes it as,
“Many individuals suddenly became rich. A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip marts, like flies around a honey-pot. Everyone imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favored clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clothes women, dabbled in tulips.
People sold possessions to speculate in Tulip market, such as 12 acres of land for on one bulb of Tulip !
How & Why Tulip Mania started ?
Since Dutch was an advanced economy & among the major financial & economic superpower of the world, they invented many financial instruments to do trade.
One such was creation of Futures Market, where contracts to buy commodity could happen. But this wasn’t developed at that time along with defined risk frameworks and strong regulator.
Tulip Flower was a novelty – questionably introduced to Europe by Ottoman Empire. Due to favourable climatic & soil conditions this flower adapted well and soon became 4th largest export product for Dutch.
People saw opportunity and started trading in Tulip Bulb. Traders would meet in Tavern and enter into contracts with small upfront fee of 2.5% of the contract value. All contracts were with individuals and no exchange participated in it & no regulatory body oversee the transactions.
The price of Tulips skyrocketed during 1636-37 due to speculations in the future market where reportedly some bulb contracts traded multiple times a day among people who never saw the bulb.
In February 1637, Tulip Bulb contract price collapsed, halting the trading to ground, ruining lives of scores of investors.
The New Tulip Bulb phenomena:
History is rich with such instances where greed and herd behaviour got better of the rational and sound principles of investing.
Fast forward to 21st century and we see the How & why of Tulip Mania in a new avatar. With onset of Covid’19, economic activities across the nations came to a halt to curb the pandemic. Pre-empting large economic crisis central banks started providing steroid (liquidity) to keep economy running. Flush with liquidity investors started looking to trade in 21st century’s Tulip Bulbs without knowing the farmers who are growing them.
Identifying opportunities to make a quick buck by investing in Cryptocurrencies or in loss making startups, the investment frenzy is gripping many retail investors, millenials, doctors, IT guyz etc, many of whom are unaware of underlying technologies and business model of the assets/ companies they are investing in.
Principles of investing guides one to invest as per risk tolerance and expect returns adjusted to it. Invest only if you know about the asset/business or upto a portion which you can live without if it gets wiped out !
Whether we are witnessing another Tulip Mania ? time will tell, as of now smart people are enjoying the ride !
