I’ve heard that the best place to see the most magical sea of tulips is in the Keukenhof flower garden in springtime. Expect to be hypnotized by a blaze of colors stretching several hectares. (Pity that the few times I’ve traveled to Amsterdam is always around Fall.)
Tulips can be so stunningly lovely that it is no surprise that in the 17th century, the Dutch master painter Jan Van Goyen exchanged two of his masterpieces for a handful of the short-lived blooms! And it wasn’t just Van Goyen – a classic example of a speculative bubble leading into a sharp market crash is the Tulip mania of 1634-7. Back then, the demand for tulips became so intense that outside of tulip season, tulip “futures contracts” had to be invented! The interest in tulips reached a frenzied crescendo in the winter of 1636 when the futures contracts were changing hands up to ten times a day.
What happened next came completely out of left field. In February 1637, not a single buyer came for an auction in Haarlem due to reports of an outbreak of the plague. It was a wakeup moment for the multitude of tulip traders. The price of tulips had risen far and beyond the ornamental and the hobby value of the flowers. Overnight, the bullishness turned into panic. Panic sent the price of tulips crashing, leading to economic crisis for the Dutch middle class that same spring.
Since that time, each and every financial market crash has been referenced to the grand-daddy of market crashes, the Dutch Tulip Mania.
Today, there is a lot of chatter about the phenomenal rise in the value of the Bitcoin as Tulipmania 2.0.
What goes up ….
Don and Alex Tapscott have evangelized through their book Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World and through articles in Fortune and other business journals about how the underlying technology of Bitcoin – Blockchain – will completely transform financial services and payment systems. Indeed, the technology is likely to be profoundly disruptive and Bitcoin is merely one of a myriad of use cases.
Bitcoin is a cryptocurrency. It is meant as a substitute for the many fiat currencies of the world such as the US Dollar or the UK Pound. Last week, the value of Bitcoin has reached a record high of US$ 17.5 thousand and the murmurs that Bitcoin is merely the latest irrational exuberance of the financial markets have grown ever louder.
Long Island Ice Tea is a New York based beverage company that has been unprofitable for some time. In a bid to turn its business around, it decided that it will change its focus away from non-alcoholic beverages into blockchain-based opportunities. While it has not taken any concrete action to implement its new vision, the company did quickly manage a change of corporate name into Long Blockchain Corporation.
The name change led to an astonishing 289% rise in the Company’s share price.
The story of this company points strongly to the emergence of yet another financial market bubble. Indeed, is a medium of exchange like the Bitcoin worth US $ 17.5 thousand in the midst of several globally accepted reserve currencies such as the US Dollar, the Euro and the Japanese Yen whose Central Banks are seriously looking into issuing their own cryptocurrencies?
Global payments is in a state of flux and will perhaps remain so in the short-term. Until we see the impact of the initiatives of the world’s central banks to integrate cryptocurrencies into the global financial order, the jury is still out for Bitcoin and the other cryptocurrencies seeking to replace the world’s reserve currencies.
That bitcoin speculators exponentially outnumber legitimate users reminds us to never forget that the paper profits of the countless Dutch tulip traders in the 17th century eventually ended in a tragic economic catastrophe. This is one instance where gravity will prevail: what goes up will come down soon enough.