3 Good Reasons Why Bitcoin is not Tulip Mania

October 29, 2017

Not too long ago, Jamie Dimon likened the bitcoin craze to tulip mania. The exact words he used “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed… It is a fraud that would eventually blow up.”  This he said after some of the most well-known figures in Wall Street came out to embrace cryptocurrencies.

Being one of the most influential people in the financial world, his words definitely carry much weight. Shortly after his comments on bitcoin, bitcoin fell to a low of about $4,106.

I have tremendous respect for Jamie Dimon and certainly do not take his words lightly. I agree there are similarities between the current bitcoin hype and the tulip mania in the 17th century. Back then in Holland, speculators are driving up the prices of virtually worthless tulip bulbs to exorbitant levels. If you had lived in 17th century Holland, the price of a tulip might have cost you your entire house. Today in the crypto markets, there are many people propagating FOMO (fear of missing out), driving up cryptocurrency prices at “a faster pace than any other speculative vehicle in market history”. 

Does the current hype in bitcoin make bitcoin a tulip mania?

Before we discuss bitcoin, let’s consider what is a bubble and why the tulip bulb bubble is bound to burst right from the start. A bubble exists when asset prices deviate largely from its intrinsic value. So, the fundamental question to ask is how much would you pay for a tulip? Back then, tulips were viewed as luxury items and status symbols for the wealthy.

Nothing wrong with that, but soon tulips evolved into a form of investment and medium of exchange. Futures contracts were created to ease the buying and selling of underlying tulip bulbs. At the peak of tulip mania, tulips were changing hands 10 times a day without any deliveries of the underlying tulip bulbs. Roughly before the crash, a tulip bulb was roughly the cost of a luxurious house in Amsterdam. The problem was that these price increases were not due to any changes in production costs or increase in usefulness of tulips.

I did some research on tulips. When you buy a tulip, you need to spend time and effort to take care of tulips. Weather conditions need to be good for the tulips to grow well. And even in perfect weather conditions, tulips can live for about 10 to 20 years. What this means is that tulips at best might be a luxury item, a status symbol, but it cannot be a good form of currency or should not be traded like other liquid investments.

What about bitcoin? Is the comparison between bitcoin and tulips fair?

Bitcoin is not perfect, but it fares better than tulips as a means of exchange or a form of alternative investment. When you buy a bitcoin today, you don’t need to spend time and effort to take care of it like tulips. As long as your bitcoin is not stolen, the bitcoin belongs to you. It stays in your digital wallet. It will not die after 10 to 20 years, like tulips.

Let me summarize 3 good reasons why I think bitcoin is not like tulips.

Reason #1: Bitcoin makes a good currency, but not tulips

There are some characteristics that any good currency should have. In all fairness, bitcoin does not tick every box. For example, a good currency should be relatively stable in value. However, the value of bitcoin is very volatile and is arguable not ideal as a currency currently. However, compared to tulips, bitcoin fares better as a form of currency because it is durable (bitcoin does not deteriorate over time or change according to weather conditions) and divisible (bitcoin can be divided into small fractions unlike tulips).

The biggest challenge for bitcoin is not the underlying characteristics of bitcoin, but rather whether it is able to gain acceptance by lawmakers and financial regulators. So far, countries like Japan and Philippines are officially accepting bitcoin as legal payment method, while others like China are more apprehensive of making it mainstream.

Reason #2: Bitcoin are used by more merchants as a form of payment, but not tulips

With the Internet, we live in a world that is much more connected electronically as compared to the 17th century. Global Internet giants and e-commerce businesses were unheard of in the 17th century. With the rise of e-commerce, cashless payments are on the rise and internet merchants are also adopting digital currencies as a payment method. Microsoft and Overstock are some companies that have started to accept bitcoin payments. The ability of bitcoin to be a form of payment accepted by global merchants is only made possible with the Internet, decentralized technologies and preference for cashless payments – something that is not possible in the 17th century. Tulips on the other hand can and should never be a form of payment, because of the reasons stated above.  

Reason #3: Bitcoin can be a good store of wealth, but not tulips

Lastly, in economically distressed countries like Venezuela, Zimbabwe, bitcoin has real world applications. As their local currencies are weakening into worthlessness, there is greater value for people to use bitcoin as a store of wealth, as compared to their local currencies. In fact, the amount of bitcoin trading is negatively correlated with performance of local currencies and economic growth in distressed regions. This clearly shows that there is a good practical use of bitcoin, unlike tulips which serve no purpose other than beauty to the eye.

Currently, bitcoin is trading close to 6000 USD. Will it soar to 10,000 USD by year-end as predicted by some ‘analysts’ or plummet to new lows? I do not have a crystal ball and I believe there are too many factors at work here. Even though I do not think that the current bitcoin hype is a tulip mania, there are other risks I have not discussed that could also negatively affect bitcoin price – fraud of ICOs, banning of crypto-exchanges, etc.


about author

Lee is currently pursuing a Master’s degree in Finance at INSEAD. Prior to his Master’s, he has worked for about five years in the treasury and accounting space. He graduated from SMU with a double degree in Accountancy and Finance, and is also a Chartered Accountant (Singapore). Other than building Excel spreadsheets and poring through annual reports, he spends his time reading and watching sci-fi movies.