INVESTING EXPLAINED: What you need to know about tulip mania – the 17th-century buying frenzy, likened to the collapse of crypto exchange FTX
In this series, we bust the jargon and explain a popular investing term or theme. Here it’s tulip mania.
I suspect this won’t be on Gardeners’ Question Time?
You are right, although it was the most carefully cultivated tulips that fetched the highest prices during the mania for investing in these blooms that seized Holland in the mid-17th century.
Tulips, which had been introduced to Holland from Turkey at the end of the 16th century, were viewed as beautiful, exotic and valuable. This led to a buying frenzy, which was at its height between 1634 and 1637.
Tulip bulbs were sold and re-sold for ever greater sums, first by growers and professional investors and then by families who remortgaged businesses and homes for a share of the action.
Get-rich-quick: Comparisons are being drawn between Tulip Mania and the collapse this month of FTX, the US cryptocurrency exchange
Why are we talking about tulip mania now?
Comparisons are being drawn between Tulip Mania and the collapse this month of FTX, the US cryptocurrency exchange.
The business enabled its 1.2million customers to trade crypto currencies or ‘tokens’, like bitcoin, providing them with ‘leverage’ (borrowing facilities).
Customers could even borrow from other customers. Bahamas-based FTX was founded by the 30-year-old former Wall Street trader Sam Bankman-Fried, 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 $32billion. Now it is worthless.
About $1billion in client funds is reported to be missing, amid allegations that cash was siphoned off into a separate fund associated with SBF.
In regulated exchanges, customers’ assets are segregated, but FTX customers discovered this was not the case when they tried to get their money back.
Did people see this coming?
In 2017, Jamie Dimon, chairman and chief executive of JP Morgan Chase, declared bitcoin to be ‘worse than Tulip Mania’.
He continued this criticism even when bitcoin was trading as high as $56,000 – it is now $14,010. This month he compared crypto tokens to ‘decentralised Ponzi schemes’.
How big did the tulip craze get?
The 1841 book – Memoirs Of Extraordinary Popular Delusions And The Madness Of Crowds – relates that bulbs were selling for the same sums as mansions on Amsterdam’s Grand Canal, or 4,000lb of cheese.
Academics of the current era claim that investors’ folly was later exaggerated as a moral lesson. But the bubble began to burst when people invested using loans, hoping to repay these borrowings from sale profits. When prices softened, they could no longer do so and were forced into bankruptcy.
Was this the first get-rich-quick scheme?
It was the first to be widely chronicled. The next was the South Sea Bubble of 1720, which promised British investors vast fortunes from trading with Spanish South American colonies. But these failed to materialise. Among the huge number of losers were King George I and Sir Isaac Newton.
What are the lessons?
That we fail to learn from history. And, if it sounds too good to be true, it is. Never risk money you cannot afford to lose and do not have dealings with unregulated investment firms.