﻿When I read all the sensational articles about cryptocurrency, bitcoins and NFTs,
I’m reminded of an old story.
No. Not that far back. Let’s rewind it a little bit. We’ll take a short trip back to 17th century
Netherlands. If you are interested in learning about one of the most spectacular get-rich-quick
binges in history, please join me in this journey. Hi, if you are new to the channel,
my name is Tae from Financial Tortoise - a channel dedicated to helping the Sandwich Generation
reach Financial Security. Also, if you would like a free copy of my “Sandwich Generation’s
Guide to Financial Security - 10 Steps to Securing Your Family’s Financial Future!”
please go to my website financialtortoise.com and download your copy today. I’ll also have a link in
the description below. In today’s video, I want to discuss a little bit of history. Specifically
what is known today as the “Tulip-Bulb Craze.” It really was one of the most spectacular boom and
bust in history and I think we can learn quite a bit from it, given history tends to repeat itself.
The story starts in 1593, when a newly appointed botany professor from Vienna,
brought to the Netherlands a collection of unusual plants, originally from Turkey. Given
that it looked like no other flower native to the country, the professor was hoping to sell it for
a nice profit. However many considered it too expensive. Ironically, it eventually got stolen
and was sold in the open market for a handsome profit to the thief. Over the next decade,
the tulip became a popular exotic item in Dutch gardens. It symbolized wealth for the affluent.
According to the Library of Economics and Liberty, "it was deemed a proof of bad taste in any man of
fortune to be without a collection of [tulips]." These tulips however would succumb to a nonfatal
virus known as mosaic virus strain and it was this that helped to trigger the wild speculation
in tulip bulbs. Tulips with this virus, would grow with a striped, multicolored pattern
rather than a single solid color. The Dutch highly valued these infected bulbs
because they were considered rare and exotic. More bizarre the bulb, the higher its value.
The stage was set for Tulipmania and it swept across all of the Netherlands. Tulip-bulb prices
began to rise wildly and it looked like there was no end in sight. The Library of Economics
and Liberty writes, "The rage among the Dutch to possess [tulip bulbs] was so great that the
ordinary industry of the country was neglected, and the population, even to its lowest dregs,
embarked in the tulip trade." Just to give you a scale of how much these guys were selling,
it is recorded that a single bulb could be worth as much as 4,000 or even 5,500 florins.
This equates to approximately $50,000 - $150,000 range in today’s money, with best tulips selling
for upwards of $750,000. By 1636, the demand for the tulip trade was so large that regular
markets for their sale were established on the Amsterdam Stock Exchange and other towns in the
Netherlands. And the more expensive the bulbs became, the more people viewed them as smart
investments. Charlas Mackay, who chronicled these events in his book Extraordinary Popular Delusions
and the Madness of Crowds, writes that the ordinary economy was essentially ignored in
favor of speculation in tulip bulbs. “Nobles, citizens, farmers, mechanics, seamen, footmen,
maid-servants, even chimney sweeps and old clotheswomen dabbled in tulips.” Sitting on
the sidelines became almost impossible. Many who said the prices could not possibly go higher,
watched in disbelief as their friends and neighbors got rich in what seemed like
overnight. In the last few years of the spree, the craze got to a level in which people started to
barter their personal belongings, such as land, home and furniture just to obtain some bulbs.
And the ingenious financial instrument called “call options” just added to the fuel to the fire.
The financial market, whether we like it or not, is quite spectacular when you think about it. When
there is a demand for people to buy something, the market always provides a way. And this instrument
called “call option” allowed speculators to get more action for their money than it was possible
before. These call options are very similar to what we have in the market today. Essentially,
a call option allows the holder to buy a certain asset, in this case a tulip bulb,
at a fixed price during a specified period. The holder of the “call option” would be charged an
amount called the “option premium” which could run 15 to 20% of the current market price of the
tulip bulb. For example, let’s say a tulip bulb is currently worth $100 dollars. FYI - I’m using US
dollars for simplicity. A “call option” would cost the buyer approximately $20 dollars. If the price
of the bulb moves up to $200 dollars, the option holder would exercise his or her right - the
holder would buy the Tulip Bulb at $100 and at the same time, sell it at the current price of $200.
From this transaction, the “call option” holder essentially nets a profit of $80 dollars. $100
dollar appreciation of the tulip bulb minus the $20 he or she paid for the call option. Smart way
to make money right? The person just quadrupled his money by using the “call option” instrument,
while an outright buyer would only have doubled his or her money. These “call options” allowed
individuals to leverage their money to increase potential rewards. Of course this came with
significant added risk. But just like many speculative bubbles, the confidence in the
bulbs started to wane and the dam cracked. The prices on these bulbs got so high that some people
decided that it would be smarter to just start selling these bulbs. By the end of the year 1637,
prices began to fall and never looked back. A large part of the rapid decline was driven by
the fact that many people had purchased bulbs on debt and credit - speculating that they
could pay back their loans once they sold their bulbs for a profit. But once the cracks started
showing and prices started to drop, holders were forced to liquidate whatever they had
at any price. Smithsonian Magazine noted that "[h]undreds who, a few months previously had
begun to doubt that there was such a thing as poverty in the land suddenly found themselves
the possessors of a few bulbs, which nobody would buy," even at prices one-fourth of what
they paid. Like a snowball rolling downhill, bulb deflation grew at an alarming rate and in no time,
panic set in. The government tried to step in and say that there was no reason that tulip
bulbs should fall in price - but like many good intentioned government interventions,
no one listened. People went bankrupt and dealers refused to honor their commitments to buy tulip
bulbs. Eventually the price dropped so much that tulip bulbs became almost worthless - selling for
no more than a price of an onion. You are probably asking at this point. Tae. Cute history lesson,
but what’s the point? Did you just waste 10 minutes of my life talking about a 400 year
old flower? Stay with me. I do have a lesson here. Spectacular booms are not new. 10 years ago we saw
it with the housing market. 20 years ago we saw it with the internet bubble. And 400 years ago, we
saw it with, of all things, some exotic flowers. The common theme across all of them has been this.
Greed. Greed has been an essential feature of every spectacular boom in history. And sadly,
every spectacular crash. In each case, some very few people have made money, some of the time.
However, most emerge with pretty big scars. As in the case of the 2008 housing market and the
17th century tulip bulb market, unsustainable prices can persist for several years. However,
eventually, they reverse themselves and these reversals aren’t gradual. They come with the
suddenness of an earthquake. Few nimble individuals are lucky enough to anticipate
the change in wind and are able to escape before everything comes down. But these are rare cases.
My takeaway is this. When we see people making spectacular returns through what seems like
spectacular investments like today's NFTs and Cryptocurrencies - it may feel hard to resist
the urge to jump in. I’m not saying there isn’t a future for cryptocurrencies or NFTs - because
I admit, the technologies behind these items are pretty amazing. And I do believe that some of
these technologies will have usage in the future - similar to how a lot of the technologies that
drove the dot.com bubble eventually came to grow the internet to we know what it is today. However,
I can’t help but have an eerie feeling when I look at how it has recently captured the imagination of
the public, as well as having spillover effects to other markets. I can’t shake the feeling that
it sounds so similar to the madness that captured the public 400 years ago in a small country called
Netherlands. Whenever we see cool new items come into the market, it’s easy to get swept up in the
frenzy. However, let’s also look to history to get some wise perspective. Thank you guys for
watching, I could be completely wrong here so I’d love to hear your thoughts on video. I personally
love learning lessons from history so whenever I encounter something I have a hard time wrapping
my head around, I look to history to see if there is something I could reference. Thank
you guys for watching. If you found value from this video, please hit the like button,
leave a comment and subscribe to the channel so that you don't miss out on any of my other
upcoming videos. I firmly believe that being part of the Sandwich Generation doesn't have
to mean financial stress. With careful planning and preparation, we can thrive during this stage
of life. Help me spread the knowledge. Thank you again and I'll see you in my next video.