Introduction
Since Bitcoin’s inception, it has often drawn comparisons to tulips, a reference to the Tulip Mania in Amsterdam between 1634 and 1637. At this time, the price of contracts for tulip bulbs reached an extraordinarily high level and then suffered a catastrophic collapse, the whole episode taking place within a few short years.
The analogy is famous because Bitcoin, especially in its early years, has seen similarly massive surges in value, often followed by a steep collapse. However, to the chagrin of its critics, Bitcoin has shown much greater strength in its price action. The ‘bubble’ has lasted 15 years instead of the three years for the tulips. Although the price reductions in Bitcoin have often been dramatic, they never seem to fall far below previous highs, and within a few short years, the price regularly begins to rise again. Far from being a repeat of the Tulip Bubble, Bitcoin, as seen just through its price action, is an entirely different entity.


Why would this be?
To understand this, we need to understand history, the law, and, in particular, the history of money and the legal structures surrounding it.
In my previous newsletter, Bitcoin & Politics, I explain how the governments of our countries govern the rules that we live by. This point may seem obvious, but many need help understanding our societal structures and how and why they came into being. Many live their lives by taking these things for granted without giving them much further thought, but then they wonder why life seems so frustrating and why it seems so difficult to change.
To understand how a car works it helps to comprehend its engine. To understand how society works, it helps to know that it has an ‘engine’ and to study how this works, too. Our government rules have managed society’s engine for the last 300-plus years, and fiat money fuels that mechanism. How different would life be if it were possible to change that fuel? You would likely need a new engine!
Historical Context
The word ‘contracts’ is the key to understanding the difference between Bitcoin now and the Tulip Bubble of the 1600s. In one of my previous newsletters, Bitcoin and the Joint Stock Company, I explained how the Central Bank of Amsterdam was set up to manage the joint ventures of merchants collaborating to fund voyages to explore the new world. Thus, the idea behind ‘contracts’ in the 1600s to manage financial agreements was a new concept. The notion of a joint stock company facilitated so many new transactions that it exploded the velocity of money, directly impacting the Gross Domestic Product of a country, as demonstrated by the graph below.

This administration of money created opportunities for securities/shares and speculative trading. For example, a merchant could make a contract not just for the price of a tulip bulb but also for the price of a tulip bulb in the future. It was using these mechanisms that the cost of tulips climbed so high. Only when the individuals engaging in these trades decided that they believed the contracts for the bulbs cost too much did the tulip bubble collapse.

Recognising that the goal and ability to eliminate corruption are relatively new phenomena for humanity is essential. In the 1600s and 1700s, corruption was rife, as I demonstrated in Bitcoin & The Southsea Bubble, so the moment enterprising individuals introduced an innovation, it opened a window of opportunity to be immediately exploited. The invention of contracts associated with business ventures at the time made more corruption possible. Financial contracts and speculative trading were very new concepts. Society had yet to discover the harm that such agreements could wreak.
The Tulip Bubble in Amsterdam was the first such consequence. Although historians will argue that the subsequent adverse effects were limited to the wealthiest in society, in many ways, it highlighted to those with resources and poor intentions just how practical such schemes could be for extracting wealth from a naive populace.

The bubble ended when buyers of tulip bulb contracts refused to fulfil the agreed future contract prices, and new buyers rapidly disappeared. The Dutch government facilitated the refusal to meet the contract prices for the bulbs by allowing the conversion of the contracts to ‘options contracts’, meaning that the merchants could complete the original agreements for only a proportion of their cost. In anticipation of this change in the law, these tulip contracts were seen as attractive as this potential change in the law to ‘those in the know’ reduced the risk of their purchase. Savvy merchants could purchase the contracts for valuable bulbs, but there was a chance that they would never need to pay the full price, essentially making their purchases risk-free. A speculative bubble ensued as the merchants caught on and sought out the contracts. The ‘bubble’ collapsed when the Dutch government enforced the new law, and the tulip contracts lost their paper value.
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