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Tulip Mania, Bitcoin and the Madness of Crowds: Déjà vu all over again?

Written By | Nov 30, 2017

WASHINGTON, November 29, 2017 – If you’ve been investing in stocks lately, the general action of the market from mid-November on has generally been unadulterated good news. Quadruple that for “investors” in virtual currencies like Bitcoin, a chimera that seems to appreciate $1,000 per day, per Bitcoin. Unfortunately, it appears that “Tulip Mania” lives in 2017.


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History has seen this type of speculative excess before. It makes us nervous to see it again. The original Tulip Mania – Version 1.0 of today’s semi-regular, so-called investment “bubbles” – arose in The Netherlands in the early 1600s. Instead of Bitcoin, however, it was the tulip bulb that caused those long-ago Dutch speculators’ blood to boil over with greed, as noted in the  following Wikipedia excerpt:

“In Europe, formal futures markets appeared in the Dutch Republic during the 17th century. Among the most notable centered on the tulip market, at the height of Tulipmania. At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsworker. Research is difficult because of the limited economic data from the 1630s—much of which come from biased and very speculative sources.”




tulip mania and other manias.

Alchemist at work. Illustration from original edition of “Popular Delusions.” (Public domain image)

History has witnessed this kind of speculative alchemy before many times since Tulip Mania took hold. That’s why it makes us nervous to see it again, this time with small and large investors alike taking insane gambles on imaginary currencies that float on thin air. Worse, we’re reading reports that millennial “investors” are loading up their virtual wallets with tiny fractions of Bitcoin.

It makes us wonder if these are the same millennials who bought into the worthless shares of Snapchat (symbol: SNAP) right after the IPO when those shares were in a brief rally phase. That useless stock has collapsed since then and is unlikely to revive anytime soon if at all, given that the genuises behind this latest fad app hold all the voting power while lay investors have none at all.

Living in a world defined by Tweets, Facebook posts, Snapchat amusements, and fads of the moment younger would-be investors in general are utterly undereducated as to how the world actually works, having wasted academic time and real money filling their heads with useless political correctness rather than acquiring knowledge during college. These kids are ripe for being fleeced by any passing fad. On the other hand, so are many otherwise rational adults. Like the Dutch adults who lost their fortunes during tulip mania.

It’s already clear that any profits to be made on Bitcoin before its value deflates in an inevitable sudden and violent decline, will go to its originators and a few wealthy investors. That’s just the way the game played out in the original Tulip Mania. Once again the little guys will be left holding the bag, largely because, at today’s increasingly inflated prices, the little guys can now only afford to acquire tiny fractions of a single Bitcoin. They’ll eventually lose their “investment,” just like tradesmen and small investors got their clocks cleaned when the Tulipmania bubble collapsed.

You can read all about that and much, much more in Charles Mackay’s timeless, entertaining 1841 classic, “Extraordinaty Popular Delusions and the Madness of Crowds.”

We may be missing the boat on Bitcoin mania. But it all looks like the Madness of Crowds to us, and we’ve seen this before – as in the 1999-2000 dot.bomb fiasco. Is this déjà vu all over again? Maybe. But let’s try to remember at this point that if something looks too good to be true, it probably is. An environment where something like Bitcoin goes up $1,000 in value per day will not last forever.

Meanwhile, back in the normal investing world, market averages are continuing to set new records. The display-window Dow Jones Industrials skyrocketed another 100 points Wednesday morning before settling down to about a +50 point gain as we write this article, approaching the noon hour ET. It’s trying for another record today, but this rally, too, could peter out without notice.

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17