Bitcoin: A Tulip Mania of 21st Century
by Harshit Gujral, Raamesh Gowri Raghavan, and Sukant Khurana
How much do you pay for a bouquet of tulips? Perhaps a few dollars, on occasion a hundred dollars, but certainly not a million dollars! Yet there were many instances in history when items like tulips, real-estate or dot-com stocks were sold at much more than their intrinsic value due to speculative investments made by a big segment of the population. In each of these instances prices rose exponentially and abruptly deteriorated.
In the 17th century, Netherlands entered the Dutch golden age. By the 1630s, Amsterdam was an important port and commercial center. The Dutch East India Company imported spices from Asia in huge quantities to earn profits by selling them in Europe. This led to a growth of skilled merchants and traders who displayed their prosperity by living in colossal mansions surrounded by flower gardens. Tulips was particularly in high demand.
Tulips were considered an exotic flower as they were imported from the East in vessels; moreover, tulips were difficult to grow as it could take years for a single flower to blossom. This situation ws further escalated by the outbreak of Tulip Breaking Virus (of the Potyviridae virus family) that made select flowers even more elegant by lining petals with multicolored fiery streaks. These select tulips were scarcer than normal tulips: as a result, the prices of these flowers as well as their popularity begin to rise along with a decline in human reason. Soon tulips became a nationwide sensation and the tulip mania was born. Tulip prices were caught in a positive feedback loop where investors were caught up in the hype due to futures speculations. Ultimately, it drove prices far above their actual intrinsic values, creating a bubble. Gradually, a collective realization that prices of tulips far exceeded their actual value took place that pushed the prices to a staggering low and led the mania to an end and the bubble to burst.
In the early 2010s, with the onset of digital banking and lack of privacy in transactions, Bitcoin was in popular demand. The outbreak of Wanna Cry virus in May 2016 tremendously contributed to the popularity of Bitcoin. Hackers demanded their ransom in bitcoin to hide the traces of their transactions. Additionally, between October to November, the Chinese Renminbi depreciated against the US Dollar. That turned bitcoin into a global sensation, recording a burgeoning increase in its exchange rate from 450 dollars in May 2016 to 17,900 dollars on 15 December 2017.
The famous trader Jim Roger has said that, “Prices can go beyond what you can imagine!”. It is always very challenging and a nearly impossible task for statisticians to predict the precise time when the bubble will burst and the mania will end. Jack D. Schwager in his book Market Wizards says that, “We can predict direction but not magnitude in the market”. Jesse Livermore, a famous American investor, and a security analyst declares, “Speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I have never forgotten that”. Only time will determine whether bitcoin is a bubble or a global revolution in currency.
References
1. Andrew Beattie, Market Crashes: The Tulip and Bulb Craze (1630s), Available at https://www.investopedia.com/features/crashes/crashes2.asp
2. Dash, Mike (1999), Tulipomania: The Story of the World’s Most Coveted Flower and the Extraordinary Passions It Aroused, New York: Three Rivers Press, ISBN 978–0–307–56082–7
3. Prateek Singh (2015), What causes economic bubbles? — TED-Ed, Available at https://www.youtube.com/watch?v=I5ZR0jMlxX0
4. Alessio Rastani (2017), The Bitcoin Bubble — How Will It End? Available at https://www.youtube.com/watch?v=NjkDQKeguZA
5. Will Hutton (2017), Bitcoin is a bubble, but the technology behind it could transform the world, Available at https://www.theguardian.com/commentisfree/2017/dec/24/bitcoin-is-a-bubble-the-technology-behind-could-transform-world
About:
Harshit Gurjal is a computer science student pursuing engineering degree. He is a researcher with Dr. Khurana’s group pioneering new tools for crypto-currency analysis.
Mr. Raamesh Gowri Raghavan is an award winning poet, a well-known advertising professional, historian, and a researcher exploring the interface of science and art. He is also championing a massive anti-depression and suicide prevention effort.
You can know more about Raamesh at:
https://sites.google.com/view/raameshgowriraghavan/home
https://www.linkedin.com/in/raameshgowriraghavan/?ppe=1
And here’s Raamesh telling his life story:
Raamesh and Sukant are working together on several projects on the intersection of science, technology, and art, and also projects on mental health.
Dr. Sukant Khurana runs an academic research lab and several tech companies. He is also a known artist, author, and speaker. You can learn more about Sukant at www.brainnart.com or www.dataisnotjustdata.com and if you wish to work on biomedical research, neuroscience, sustainable development, artificial intelligence or data science projects for public good, you can contact him at skgroup.iiserk@gmail.com or by reaching out to him on linkedin https://www.linkedin.com/in/sukant-khurana-755a2343/.
Here are two small documentaries on Sukant and a TEDx video on his citizen science effort.
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