Op Ed: Tulip Myths and Modern Cryptocurrency Skepticism
“Ever heard of tulips?” It’s a question anyone who is publically involved in the cryptocurrency space has been asked multiple times. With the enormous gains in value the industry has seen, many observers come to the same conclusion. It’s a bubble.
The take is not a terrible one and many experienced cryptocurrency traders agree with the sentiment. Bubbles have come to be an expected occurrence in the space. The difference in opinion comes when deciding whether the “pop” will be a minor setback or the final conclusion in an exciting but short-lived ride.
On one side are the supporters of cryptocurrency. Their motivations can be boiled down to two points: desire for profits and a belief that the technology will benefit humanity. They believe that bubbles are a natural phenomenon in price discovery and an inevitable part of the long-term upward trend in value that will occur as cryptocurrencies become more utilized. They also understand that, while bubbles can hurt some traders in the short term, they are a necessary evil in the development of a technology which stands to dramatically increase human financial freedom. Sometimes these motivations can seem at odds, but in general they coexist within the community.
Get rich making the world a better place. It’s an attractive pitch.
On the other side are the skeptics. Doubt in cryptocurrency has made strange bedfellows of a band of commentators as diverse as it is vocal. Nobel prize economists, billionaire bankers, goldbugs and central banks have all weighed in to signal their prediction of the industry’s inevitable demise. And with the spotlight of increasing coin valuations has come even more doubters. In the age of Twitter, it’s almost essential that you have an opinion on the matter and that you let the world know it. For detractors, the tulip meme often comes into play:
For skeptics as much as believers, there is a personal economic motivation. While they may not have cashed in on the extraordinary rise of cryptocurrencies, they think the game is rigged from the start. By keeping their hard earned cash out of the market, they are saving themselves from an “inevitable” crash to zero.
But under this current of self-preservation is an ethical play opposite to that of cryptocurrency supporters. Many detractors believe that this technology is not just ridiculous but actually harmful to society. What drives this outlook? The true history of the tulip bubble can give us an interesting view of the motivations driving their sentiment.
An Early Mania
Tulip Mania is the go-to story whenever someone wants to talk about humanity’s penchant for irrational exuberance in financial markets. It’s the catchy name for the extraordinary rise in value, and subsequent crash, of Dutch tulip bulb valuations over a four month span from November 1636 to February 1637. This phenomenon had devastating effects on the Dutch economy and left many people in financial ruin.
At least that’s how the story is told.
But according to Anne Goldgar, Professor of Early Modern History at King’s College London and author of Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, the popular story is mostly an exaggeration.
“We have heard how these bulbs changed hands hundreds of times in a single day, and how some bulbs, sold and resold for thousands of guilders, never even existed. Tulipmania is seen as an example of the gullibility of crowds and the dangers of financial speculation. But it wasn’t like that … not one of these stories is true.”
Goldgar uses extensive research to expose that, while there was a rise and crash of tulip prices, much of what we believe about the period is the product of historical exaggeration from a small number of writers.
What drove this? According to Goldgar, it was a product of societal anxieties triggered by the immense riches of the Dutch Golden Age. As Lorraine Boissoneault writes in Smithsonian Magazine’s recent piece on the book, “All the outlandish stories of economic ruin, of an innocent sailor thrown in prison for eating a tulip bulb, of chimney sweeps wading into the market in hopes of striking it rich — those come from propaganda pamphlets published by Dutch Calvinists worried that the tulip-propelled consumerism boom would lead to societal decay.”
English historian Simon Schama also writes of the period: “The prodigious quality of their [the Dutch] success went to their heads, but it also made them a bit queasy. Even their most uninhibited documents of self-congratulation are haunted by the threat of overvloed (abundance) ... a word heavy with warning as well as euphoria.”
When looked at through the lens of this historic research, the legend of the tulip bubble becomes less about financial mania and more about the way that an economic memory can reflect a society’s collective mindset. The Dutch Golden Age represents a period during the 17th century when “Dutch trade, science, military, and art were among the most acclaimed in the world.”
This transformation was termed the “Dutch Miracle” by historian K.W. Swart. But, while it is easy to look back now and realize this era was a huge stepping stone to the modern prosperity the Dutch people enjoy today, at the time the progress was not as apparent. Many of the Dutch found a hard time adjusting to a society where fortunes were being created overnight. Schama compares the mindset to one which was found by de Tocqueville in 19th century America: “that strange melancholy which often haunts the inhabitants of democratic countries in the midst of their abundance, and the disgust at life which sometimes seizes upon them in the midst of calm and easy circumstances.”
While there was undoubtedly a run on Dutch Tulip prices, it seems there was an equal run on seizing the opportunity to find a negative aspect to extraordinary societal progress. Today, we are seeing the same mindset from cryptocurrency skeptics.
Cryptocurrency has arrived at an uncomfortable moment in history. There is a wide debate surrounding whether or not technology is hurting human progress. Many argue that smartphones are making kids depressed and robots are taking our jobs. The thought is that technology which was supposed to make life better is instead causing us to become stupid, antisocial and unhealthy. On top of this, the freedom of speech made possible by the internet is being questioned for the alleged harm it can cause to democracy.
It is in this atmosphere of negativity that critics have found their “tulip moment” in cryptocurrency. It is being latched onto as an lightning rod for these growing worries about a society that is becoming radically shaped by the digital age. Detractors consistently ignore any possible justification for cryptocurrency to be considered useful and instead focus on its most distasteful features:
Haha, I feel sorry for all you losers who missed out on the Bitcoin train. You should've bought in years ago, like me: A perfectly normal man who coincidentally hoarded a virtual currency during a time when it's only use was for sex trafficking and purchasing organs.— Shane (@Shanehasabeard) December 8, 2017
Many cannot push their analysis past observations of price movements. Warren Buffett partner Charlie Munger has described the cryptocurrency scene as “total insanity” and recently told an audience at University of Michigan’s Ross School of Business, “I think it is perfectly asinine to even pause to think about them. It’s bad people, crazy bubble, bad idea, luring people into the concept of easy wealth without much insight or work.”
Others, echoing popular sentiment questioning unbridled freedom of speech, are worried about a lack of governmental oversight. Back in 2013 author Charlie Stross wrote in Why I Want Bitcoin to Die in a Fire that “Bitcoin looks like it was designed as a weapon intended to damage central banking and money-issuing banks, with a Libertarian political agenda in mind — to damage states’ ability to collect tax and monitor their citizens’ financial transactions … late-period capitalism may suck, but replacing it with Bitcoin would be like swapping out a hangnail for Fournier's gangrene.”
Economist Paul Krugman cited the article in his piece Bitcoin Is Evil, adding “Stross doesn’t like that agenda, and neither do I.” While Krugman did admit he was open to conversation on the topic, fellow economist, Joseph Stiglitz, has been less forgiving. Recently he told Bloomberg “Bitcoin is successful only because of its potential for circumvention, lack of oversight...So it seems to me it ought to be outlawed … It doesn’t serve any socially useful function.”
The Progress Paradox
Are these arguments baseless? Not at all. Cryptocurrencies do in fact make many unsavory things possible. But, much like supporters believe bubbles are a necessary evil for price growth, they also believe that some illicit activities are a worthwhile trade-off for the ability to have a censorship-resistant, value-transfer system. They believe the win for personal freedom trumps all else.
It looks as if this idea is spreading. Bitcoin alone has grown from roughly 6,000 transactions per day in January of 2011 to 240,000 transactions on January 1, 2018. With 1000+ other cryptocurrencies, each growing their own communities, this desire for this financial independence appears contagious.
To the critics, these statistics do not matter. They will continue to focus on perceived faults. As the myth of the Tulip Bubble illustrates, this is rooted in human psychology. Some people are set on ignoring the progress around them.
De Tocqueville observed: “In America I saw the freest and most enlightened men placed in the happiest circumstances that the world affords; it seemed to me as if a cloud habitually hung upon their brow, and I thought them serious and almost sad, even in their pleasures.” Over the last few centuries, technology has made our lives less nasty, brutish and short. But, for some of us, the natural reaction has been to question whether it was really worth it.
Cryptocurrency now finds itself at the center of this larger debate over the morality of technology in a developing society. If supporters have their way, it holds the power to usher in a new era of human economic freedom. If critics have their way it will be regulated to death.
Let’s hope one side ends up as forgotten as Calvinist pamphlet writers.
This is a guest post by Kenny Spotz. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Media.