The Original Bubble: How a Flower Became History’s First Financial Mania

The 17th century painting above satirizes the tulip trade in the aftermath of its demise a few years earlier. In this scene, Jan Brueghel depicts a monkey at the center auditing tulip sales, while another holds up a tulip and a moneybag. To its left, human-symbolizing monkeys shake hands to close a deal. The monkey furthest to the right urinates on the flowers in a commentary on their worthlessness.

Brueghel's masterpiece is a scathing critique of Tulip Mania, the first documented commodity bubble, which occurred in Holland during the Dutch Golden Age.[1] The event was characterized by a steep increase in the price of tulip bulbs, and ended in the sudden collapse of an entire industry.

Although Allegory on Tulipmania is difficult to understand without knowing its historical context, Brueghel nevertheless establishes a precedent that skepticism is superior to the folly of blind speculation. In fact, this economic event from 400 years ago serves as a perfect reminder for investors to approach commodity bubbles with rationality in efforts to safeguard their fortunes.

Tulip Mania: An Overview

Tulips were first introduced to Europe from Turkey in the 1550s.[1] Over time, different varieties of tulips became a costly commodity as demand outpaced supply in Northern Europe. The value of the flowers reached their height in Holland between 1633 and 1637.[2]

Tulips quickly became a status symbol for the wealthy and the growing upper middle class. However, the flower took years to grow from a seed, which is why bulbs became more valuable when it was discovered that the flower could be grown much faster from a bulb.[2] By 1634, speculators began entering the market in hopes that they could sell bulbs for higher than they purchased them.

The first tulips to arrive in Europe initially featured a single color, but with experimentation, petals with streaks of different colors became the most prized. By the 1620s, the most valuable tulip variation was the Semper Augustus.[3]

The Dutch Guilder was the currency at the time. For context, the highest price that a bulb was sold for during the period was about 5,200 guilders.[5] In comparison, 3,000 guilders was the typical annual salary of a well-off merchant.[5]

But in February of 1637, the trade collapsed. Speculators could not afford the astronomical prices of even the cheapest bulbs.[5]

The crash began at an auction in Haarlem, when investors refused to bid on the bulbs, even when the price was lowered repeatedly.[5] The auctioneer was unable to find buyers, and this sent a panic through leveraged speculators who had borrowed money to buy and resell the bulbs. At the end of it, florists who had only paid a small deposit owed bulb owners huge amounts of money. At the time, there were no bankruptcy protections or procedures to guide resolution; florists and bulb owners were forced to settle their claims independent of the courts.[7]

Luckily, the effects of Tulip Mania were contained, as only a small fraction of the population participated in the tulip trade, and the banking and credit sectors were not directly involved.[11] Most purchases were made on the futures market. When the price of tulips crashed, futures contracts were considered to be gambling debts, and therefore unenforceable by the courts.[7] In short, contracts became void and growers could not find new buyers to recover money owed to them.

A Futures Market

The tulip trade was poorly regulated, allowing any citizen with the financial means to participate.[7] Interestingly, participants rarely sold the actual flowers themselves, but rather traded the rare varieties of bulbs. To ensure that a buyer had the right to specific bulbs that would be blooming in the spring, traders purchased futures contracts. The exchanging of these contracts created forward markets, and the contracts themselves were derivatives.[5][7]

Most tulip futures required no money down. One could simply acquire a contract with a signature.[7] Many investors aimed to purchase futures in the winter, sell them to someone else before the spring, and pocket the difference. A considerable portion of these contracts also had non-recourse provisions, allowing the owner to walk away if they couldn't pay up when the flowers bloomed.[12]

In the end, people defaulted on their contracts, and some who had already made payments were left in debt or bankrupted. Others had taken on debt to purchase contracts, hoping to turn a profit on resale.[7] The bulbs became so valuable that people started using their futures contracts as currency, enabling them to purchase property with a handful of bulbs.[4] Bulbs could be as expensive as a bride's dowry or a brewery enterprise.[4][9]

Today's Tulips

It is important to recognize when utility and value diverge. The tulip trade offered a vivid early example, but the same dynamic has reappeared across multiple asset classes in the modern era.

NFTs

Non-fungible tokens (NFTs) are digital assets that link ownership to one-of-a-kind objects, including art pieces and music.[15] They are traded on blockchains like Ethereum, allowing users to track ownership. Each token has different properties, which explains why similar-looking tokens may be priced very differently. Digital art, however, is the most popular form of non-fungible tokens.[15]

NFTs were supposed to be the next big thing in 2021, but the market experienced a dramatic downturn in the following two years. Part of this was due to oversaturation, with over 1.5 million tokens being traded each month in 2022.[15] Even popular companies like Nike, Gucci, and Starbucks began launching their own NFTs for investors to purchase.

Similar to tulip bulbs during the 17th century craze, NFTs have no underlying value to back them up. An investor could hope to sell a token for more than they purchased it, but there is no guarantee that the asset will increase, or even maintain, its value. A false sense of value is continuously fueled by speculation. And despite the steady return of digital tokens, NFTs remain a risky investment.[15]

Crypto Futures

Another investment that has long been hyped up is cryptocurrency. Cryptocurrencies, better known as "crypto," are decentralized currencies that are not regulated or issued by governments or banks.[16] Like NFTs, crypto operates on blockchains that record transactions.

Most crypto, with the exception of Bitcoin, is not widely accepted as a common medium of exchange for business and consumer transactions.[16] Like NFTs and tulips, no commodities back the value of most cryptocurrencies. Rather, their value is derived from market speculation. This factor makes crypto highly volatile, and holdings are subject to fluctuations overnight given that markets trade around the clock.[16]

Crypto is a fascinating alternative that has captured the attention of millions. However, the lack of tangible value associated with it, paired with its susceptibility to speculation-driven pricing, has created a bubble that many believe will eventually dissipate.

Artificial Intelligence and Tech Stocks

Right now, all eyes are on artificial intelligence. Tech companies like NVIDIA, Alphabet, Microsoft, and Palantir race to build new data centers to sustain the demand for new models. This feat requires no small investment. In fact, Alphabet, Microsoft, Amazon, and Meta are projected to spend a whopping $400 billion on AI this year.[17]

Looking at this figure, a person may think that the true value of artificial intelligence justifies this substantial investment. But on the contrary, only 5% of firms that have incorporated AI into their workflows have noticed an improvement in their bottom line.[17] The investment seems even more unfounded after learning that only 3% of AI's total user base actually pays to access its services.[17] The lack of revenue, in addition to inevitable government regulations concerning the environmental degradation and electricity toll induced by data centers, makes a strong case that there is a massive AI bubble.

Unlike NFTs, crypto, and tulips, there is significant capital behind artificial intelligence. But the trillions of dollars funding data center construction do little to mask the unprofitability of large language models.[17] As investors come to realize this discrepancy, tech equity will face pressure.

An Important Lesson

Tulip Mania was entirely preventable. All investors needed to do was approach the trade with a rational mindset. After factoring in the divergence of tulip utility and value, along with the unsustainable public craze surrounding the flower bulbs, one could have easily come to the conclusion that the trade would end the way it did.

Although the tulip trade ended disastrously for many participants, it remains a powerful reminder of the importance of disciplined investing. Speculative enthusiasm alone is not a strategy. Investors must thoroughly research assets of interest and actively manage risk. When pursuing volatile assets, whether NFTs, cryptocurrency, or high-growth tech equities, building a well-balanced portfolio becomes essential. Through diversification, strategic position sizing, or even hedging mechanisms such as short-selling, maintaining balance can mitigate downside exposure. Paired with rigorous research and a thoughtful risk framework, financial catastrophe becomes far less likely.

Timeline of Tulip Mania