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Let's Reminisce: From tulips to Bitcoin
By Jerry Lincecum
Jan 9, 2018
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As I read news reports almost daily about the digital currency called Bitcoin, I am reminded that we humans can be drawn like a moth to flame by the speculative fads of the marketplace. The promise of quickly making a fortune often lures even experienced investors. Like gamblers in a casino we play against the odds, paying inflated prices and dreaming of quick profits.  More about Bitcoin later, but first some history about our human tendency to get carried away by speculation.

I remember reading an important book by Charles Mackay, who was the first to study the psychology of crowd behavior and how it makes humans vulnerable to classic scams and stock bubbles.  In 1841 Mackay published Extraordinary Popular Delusions and the Madness of Crowds, and his best case study was “tulip-mania.”  In the early 17th century the introduction of tulips into Europe coincided with the rise of a Golden Age of economic prosperity in Holland, and the new flower became a coveted luxury item.  Since the number of bulbs available was limited and the only way to increase the supply was slow, merchants created a “futures market” in which they would contract to pay a grower a certain price when his crop came in.  They could then sell these contracts to other merchants for inflated prices, making a quick profit.

The tulip was different from other flowers known to Europe at this time because it had an intense petal color, and hybridizing produced lovely multicolor effects.  Growers gave their new varieties fancy names (like “Admiral van Eyck”), and the upper classes paid high prices for them.  As speculators entered the market, the prices for future contracts spiraled out of control until a single fancy tulip bulb sold for more than ten times the yearly income of a skilled laborer.  After a year of this craziness, the market bubble burst and many speculators lost heavily.

Which brings me to the late news about Bitcoin: In one day near the end of December, its price tumbled sharply, wiping out one-fourth of its market value in 24 hours.  Compared to its peak price, Bitcoin lost about $110 billion of its total market value in less than one week. But why and how did this digital currency become as highly coveted for investors as tulips had been four centuries earlier in Holland?

Bitcoin is an artificial currency and a worldwide payment system.  It was invented in 2009 and released as open-source software.  As the first decentralized digital currency, it works without having a central bank or single administrator, thereby simplifying payments for goods and services on the internet.  What has made Bitcoin attractive to investors is the volatility of its market price.

It started out low and went through a number of ups and downs in the early years.  As of August 2014 a single Bitcoin was under $600.  A number of economists warned that it could become a Ponzi scheme or speculative bubble, and others argued that it was especially useful for drug dealers and rogue countries like North Korea because it enabled them to avoid any traceable records of dirty funds.  But that did not deter investors from bidding up the price to almost $20,000 per Bitcoin in December 2017.

As a result speculators who had bought Bitcoin shares in the early years have seen a return on their investment of more than 1,000%, making some of them millionaires.  For one or two individuals who have been the subject of media coverage, the only problem was that the only way to access their millions in Bitcoin funds required a password they had forgotten or never recorded.

For all Bitcoin investors the big problem is how to know when the price has peaked and thus to sell before the bubble has burst.  Today we still associate tulips with Holland and they are readily available for a modest price.  Will we someday use Bitcoin to pay for a newspaper or a cup of coffee without thinking of it as a Ponzi scheme or a stock market bubble?

Jerry Lincecum is a retired Austin College professor who now teaches older adults to write their autobiographies and family histories.  Email him at jlincecum@me.com.