RBI governor, Shaktikanta Das recently took a dig at crypto saying there is no underlying asset, not even a tulip.
What does this mean?
It was a reference to the tulip mania of the 1600s.
Thread🧵
What does this mean?
It was a reference to the tulip mania of the 1600s.
Thread🧵
Ogier de Busbecq was the ambassador of the Holy Roman Emperor to the Sultan of Turkey. The Sultan sent with Ogier, the first tulip seeds and bulbs to Vienna.
He planted the same. These bulbs started getting distributed to Antwerp, Amsterdam, Netherlands, etc. The tulips grew remarkably well in the Netherlands.
Compared to the existing flowers that were available in Europe at the time, the tulip had a very intense saturated color. This made it a favorite of Dutch nobles who used it as a status symbol.
Trade of grown tulips, tulip bulbs, seeds took off like crazy. There were futures contracts that florists entered with tulip growers before the tulip was even planted. First formal futures exchange was set up where traders met in the bars & taverns to discuss prices & trades.
By 1636, tulips were the 4th biggest export of the Netherlands. People kept buying bulbs at higher and higher prices, hoping to re-sell them at an even price for a profit.
Tulip Price Index (yes Tulip had its own index also) increased multifold within a year.
Tulip Price Index (yes Tulip had its own index also) increased multifold within a year.
"Viceroy" was a highly sought after type of tulip which as you can see in below figure was sold for very high prices.
Price of its single bulb was ten times the annual salary of skilled craftsworker.
(F stands for florin which was currency of Netherlands during those times).
Price of its single bulb was ten times the annual salary of skilled craftsworker.
(F stands for florin which was currency of Netherlands during those times).
However schemes like these can’t last unless someone was ultimately willing to pay such high prices and take possession of the bulbs.
Starting February 1637, tulip traders could no longer find new buyers willing to pay such high prices for their bulbs. As the market realised this, the demand for tulips crashed overnight, and prices plummeted.
Many people were left holding contracts to purchase tulips at prices now 10x higher than those on the open market, while others had possession of bulbs now worth a fraction of the price they had originally bought them for.
Such speculative bubbles show up from time to time like the dotcom bubble of the 90s or housing prices in 2008. Key to avoiding them is to stop investing just because prices are rising. Invest in assets that you believe in, not because you feel someone else will pay more.
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