Last Updated on 17 November, 2020 by Therobusttrader
Tulipmania is the name of one of the first financial bubbles that took place during the 17th century in The Netherlands. In the years of 1636-1637, the price of one tulip rose to cost as much as one house, only to plunge in value shortly thereafter.
Tulips arrived in the Netherlands during the last part of the 16th century. Due to the high prices, they were at first only available to the richer half of the population. Tulip bulbs were hard to produce, which lead to a situation of high demand and low supply. Together with the ability of the tulip to easily form hybrids of eye-catching colours and grandeur, the price began to rise as more and more hybrids that caught peoples interest were introduced. The tulipmania indeed had started, and in 1623 the price of one tulip was 1000 guilders. Ten years later, in 1633, a house in the city of Hoorn was sold for 3 rare tulips.
Tulipmania- What Happened Next?
Tulip bulbs were now used as money, and were soon turned into futures. The trading was unregulated, and nobody could ensure that there were any tulip bulbs to be delivered once the contract expired. Soon, in 1636 one tulip bulb was valued at 10 000 guilders, which was as much as one house in the central parts of Amsterdam. The tulipmania was at its peak and the bubble was soon to collapse.
In February 1637 the rise in the price of tulip bulbs stopped. Initially, investors believed it was only a temporary slowdown. However, soon some concerned investors began to sell their tulips and more followed. Prices plunged, leaving many investors deeply in debt. The tulipmania bubble had burst!
The buildup of the tulipmania bubble resembles the typical financial bubble, and by analyzing the chain of events that lead to the crash, we may be warned of future bubbles. Greed and irrational expectations as were seen during the tulipmania, is something that can be observed in nearly all market bubbles, and tends to precede market crashes in general.