What is tulip mania? Investing Explained

In this series, we break down the jargon and explain a popular investment term or theme. It’s tulip mania here.

I’m guessing this won’t be on gardeners question time?

You are right, although it was the most carefully bred tulips that fetched the highest prices during the mania to invest in these flowers that took possession of the Netherlands in the mid-1700s.

Tulips, introduced to the Netherlands from Turkey at the end of the 16th century, were seen as beautiful, exotic and valuable. This led to a shopping spree, which was at its peak between 1634 and 1637.

Tulip bulbs were sold and resold for increasing amounts, first by growers and professional investors and then by families who mortgaged businesses and homes for part of the promotion.

Why are we now talking about tulip mania?

Comparisons are being drawn between Tulip Mania and the collapse this month of FTX, the US cryptocurrency exchange.

The company enabled its 1.2 million customers to trade cryptocurrencies or “tokens,” such as bitcoin, giving them leverage. Customers could even borrow from other customers. Bahamas-based FTX was founded by 30-year-old former Wall Street trader Sam Bankman-Fried, better known as SBF. His life and times seem likely to be turned into a book written by Michael Lewis, author of The Big Short.

What went wrong?

At the beginning of this year, FTX was worth $32 billion. Now it’s worthless.

About $1 billion in client funds are reported to have gone missing amid allegations that cash has been shifted to a separate fund related to SBF. Regulated exchanges have clients’ assets segregated, but FTX clients found that wasn’t the case when they tried to get their money back.

Did people see this coming?

In 2017, Jamie Dimon, chairman and CEO of JP Morgan Chase, stated that bitcoin is “worse than Tulip Mania.”

He continued this critique even as bitcoin traded as high as $56,000 – it’s now $14,010. This month, he compared crypto tokens to “decentralized Ponzi schemes.”

How big has the tulip craze become?

In the 1841 book – Memoirs Of Extraordinary Popular Delusions And The Madness Of Crowds – it is said that bulbs were sold for the same amount as mansions on the Grand Canal in Amsterdam, or 4,000 pounds of cheese.

Academics of the current era argue that investor folly was later exaggerated as a moral lesson. But the bubble began to burst as people invested with loans, hoping to repay those loans from sales profits. When prices fell, they could no longer do so and were forced to go out of business.

Was this the first get-rich-quick scheme?

It was the first to be recorded on a large scale. Next was the South Sea Bubble of 1720, which promised British investors huge fortunes by trading with Spanish South American colonies. But these failed. Among the huge number of losers were King George I and Sir Isaac Newton.

What are the lessons?

That we don’t learn from history. And if it sounds too good to be true, it is. Never risk money you can’t afford to lose and don’t deal with unregulated investment firms.