This week, I read an article about celebrities getting into trouble for involvement in the now-defunct cryptocurrency exchange company FTX. The company, valued at $32 billion in January 2022, is now worthless and under investigation.
The list of celebrities includes household names and ranges from pro athletes and musicians to actors and entrepreneurs. Many lost money; a few were sued for promoting the crypto company as spokespersons.
This reminded me of another story.
A 17th-century Dutch Obsession
In 1593, a botany professor from Vienna brought to Holland a collection of unusual plants from Turkey. The Dutch were fascinated: they had never seen flowers with such intense, saturated colors. The professor sensed an opportunity and tried to them at a high price. One evening a thief broke into the professor’s house, stole the bulbs, and made a handsome profit.
Over the next 30 years, tulips became a darling in Holland. Many tulips were infected by a nonfatal virus, which gave the petals colorful, flame-looking stripes. The more exotic the tulips looked, the more popular they were.
As the flowers gained public interest, professional growers would predict the trends for the upcoming season as fashion designers would today. Merchants bought extra stockpiles anticipating a future price increase, further driving up prices. Even the French and the English became obsessed.
As trading volume increased, moving the tulips around became a hassle, so some traders and speculators invented new forms of financial contracts. This type of instrument is known today as an option contract. Essentially, it’s a piece of paper that gives the option holder a choice to buy tulips at a fixed price over a period of time. These paper contracts could change hands up to five times a day without any parties touching the flowers.
Got Tulips?
The tulip fever turned into high gear between 1634 and 1637. Tulips became a status symbol: it represented great taste and a smart investment.
Some people thought this was crazy; they didn’t believe the tulips could be worth that much. But as they saw their friends and families make a fortune, they felt left behind, so even those who initially resisted jumped in.
As author Charles MacKay wrote in Extraordinary Popular Delusions and The Madness of Crowds, “nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants, even chimney sweeps, and old clotheswomen dabbled in tulips.” Ordinary people bartered their personal belonging, such as land, jewels, and furniture. Everyone imagined this was the new normal: the passion for tulips was here to stay.
At the height of the tulip mania, some bulbs sold for ten times the annual income of a skilled artisan. Another account showed that a special bulb called the viceroy was traded for the following: 1,500 kilograms of wheat, 3,000 kilograms of rye, four fat oxen, eight fat swine, 12 fat sheep, two barrels of wine, four tons of beer, two tons of butter, one thousand pounds of cheese, a bed, clothes, and a silver drinking cup.
All for one bulb!
This period was filled with comical anecdotes, too. An amateur botanist from England saw what looked like an onion root in a conservatory that belonged to a wealthy Dutchman. He took a knife, peeled off its coats, and cut the root into pieces. As he examined the root, the owner returned and asked furiously what he was doing. The Englishman replied, “Peeling a most extraordinary onion.” The Dutchman grabbed him by his collar. The Englishman was shocked and escaped to the streets, followed by a furious mob. Only when in the court of law did the Englishman realize the “onion” he destroyed was an extremely valuable type of tulip; he ended up in prison.
During the three months between November 1636 and February 1637, the price of certain tulips increased 100-fold.
Eventually, prices became so ridiculous that people started to sell their bulbs. Soon others followed suit. As supply flooded the market, prices fell like a snowball rolling downhill, triggering more fear. Panic ensued and reinforced the vicious cycle. Many now held beautiful flowers nobody wanted; all they could do was watch the tulips wilt.
400 Years Later
This story sounds ludicrous today: Who will trade ten years of salary for flowers that don’t last?
But several remarkable speculative mania have already happened a quarter into this century. In early 2000, Internet companies with no revenue but a promise to change the future were trading at sky-high valuations, resulting in the 2001 dot-com bust.
In the mid-2000s, banks and mortgage lenders rode the housing boom driven by low-interest rates and made tremendous profits from selling loans and complex financial instruments. A person without income in the US could get a loan without a downpayment, buy a half-a-million house, and flip it for tens of thousands of dollars more. The music eventually stopped; the subprime mortgage crisis followed in 2008.
As cryptocurrency gained traction over the last decade, a software engineer created the now-infamous Dogecoin in 2013 as a joke. The crazy thing? Dogecoin is alive today. Last I checked in July 2023, it traded at 1 DOGE to 0.066 USD.
These financial mania have their own causes and nuances, but the underlying theme is the same: the promise of quick profits.
FTX is another cautionary tale. It reminds us that we will encounter more pitches of “life-changing investment opportunities” endorsed by people we trust. Many will jump on, and we may feel like a fool for not.
My personal take: If I can’t afford to lose, it’s not a game I should play.
“Many who, for a brief season, had emerged from the humbler walks of life, were cast back into their original obscurity. Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.” — Charles MacKay on Tulip Mania
Reference:
- Extraordinary Popular Delusions and The Madness of Crowds, Charles MacKay
- A Random Walk Down Wall Street, by Burton G. Malkiel (Chapter: The Tulip-Bulb Craze)
- Tulip Mania, Wikipedia