Blockchain tulips
The parallels between Tulip Mania and ICOs
Founded in 1602, Amsterdam was the birthplace of the world’s first stock market. Not coincidently Amsterdam and the Netherlands were also the locations of the Tulip mania a couple of years later. In practice, it wasn’t really the tulip bulbs themselves that had inflated prices, but the price of the future contracts for the bulbs that exploded. The bulbs themselves, representing the actual underlying value could only be physically traded from July to September. The rest of the year they needed to be cultivated to ensure flowering and reproduction of the bulbs. The data on the prices of tulip bulbs at that time is not reliable since most of the documentation is of after the prices collapsed. However, multiple stories are known about how one tulip bulb could be sold for the price of an Amsterdam city center house. These houses can still be seen on the streets of Amsterdam and are worth millions of euros now!
At the peak of Tulip mania, a single tulip bulb would be priced the same as 250 fat sheep! For a comparison, you could get 100 tulip bulbs for €12 now, which is basically the cost of lunch…
So were tulip bulbs just a fad that no one in their right mind should have invested in? Certainly not!
The obsession with tulips occurred when The Netherlands was in the Golden Age, which lasted for about 120 years. Tulips then were the Buggatis now for the top 1%. On top of that, a whole new industry was established because of Tulip mania. The Keukenhof (one of the world’s largest flower gardens) is one of the largest tourist attractions of The Netherlands, having attracted over 50 million people from around the world since it opened 69 years ago. The Netherlands is also by far the largest flower exporter in the world with a market share of 52%, followed by Columbia at only 15%.
Interesting fact: The Keukenhof requires 7 million new tulip bulbs every year that are supplied for free by about 100 growers… A far cry from the arm and leg you would have to cut off to get 1 tulip bulb in the 1600s.
The problem was irrational speculation or as Charles Mackay in 1841 described it: “National Delusions”, “Peculiar Follies”, and “Philosophical Delusions”. At some point in the uptrend, people start following people regardless of their own rationality when it comes to investing. And we don’t seem to be learning. In my 41 years of life, I have lived through the Dot-com bubble of 1999 and 2000 and the subprime crisis of 2007 and 2008. Both in hindsight were foreseeable, but we all choose to ignore that while it lasted anyway.
For example, when exactly does it make business sense to transport 50 kg of cat litter for free because the user interface for buying it has changed from a store to a computer screen? And how likely is someone to pay back their mortgage if they don’t have a job? From a rational perspective, it does not make any sense. Economics might not be the most exact of sciences, but regardless of how you crunch and manipulate your numbers, these business cases would never fly, we just chose to disregard that for a while.
Over time, nine out of ten startups fail. Nevertheless Block.one raised a $4 billion through its ICO at the end of May for a platform that is not yet developed. Apparently, the founder is brilliant at what he does, but is his brilliance really worth $4 billion? Not having a product is very normal in the ICO space in general. But what’s truly mind-boggling is when the startup clearly states on their website that ‘they are a scam’ and yet still get funded. Case in point, decentralising Jesus on the blockchain has a current market cap of $347,000.
There are a lot more questionable as good companies in the ICO space right now, and herds of people are still taking the bait. A lot of the luckier ones will make large sums of money by selling right in time, but the majority will not and lose 90% of what they initially put in. This has happened over and over again in the past when people started speculating and inflating bubbles that should never have that kind of value attached to it, ever.
As with all the previous bubbles that all popped (just a reminder) a real economy will arise from this. We know that at least 10% of the current ICO companies will yield fantastic returns, creating a business that might indeed change the world economy. In fact, it is probable that more than 10% of these companies will be successful in the long run, since most startups fail due to a lack of funding which these companies are currently circumventing. Raising $25 million at one shot basically lets your startup jump from bootstrapping to B, C or D round. The ones that do survive the eventual burst of the bubble, are likely to build products in the next 5 years that we mere mortals would never have thought about, just like Google and Facebook have.
As an investor looking for more long-term gains, the only sensible thing you can do to get on board is using your good old-fashioned common sense at all times. That means using old-school tactics that have worked overtime like looking at the real market opportunity (disregarding the day-to-day hype of the underlying crypto exchange), the experience and real market knowledge of the team, the stage of the company, current traction, etc.
More importantly, decide on your risk appetite and whether you can afford to invest. If not, just don’t and don’t follow the trend that all the popular kids follow.
When the ICO bubble deflates, a lot of people will lose a lot of money and be angry. Court cases will be held, governments will be accused of not putting enough regulations in place to protect them, the companies losing the money will be branded criminals. But chances of anyone actually being punished are small, simply because you should have known you were gambling. No court in 1639 enforced payment of any tulip futures contract. The judges regarded the debts as contracted through gambling, and thus not enforceable by law.
So play with caution but still play hard!
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