Blockchain, Tulips, and the South Sea Bubble

Investors can learn a lot from history. Since at least the seventeenth century, asset bubbles such as Tulipmania and the South Sea Company have inflated and burst, costing investors tremendous losses. The blockchain has seen similar market activity. What the blockchain, tulips, and the South Sea Bubble have in common is misplaced value. It’s time to learn from history.

Rife with scandal

The blockchain has been rife with scandal in its two main incarnations: NFT and cryptocurrency. Leading up to the 2021 bull run, when NFTs rocketed, and bitcoin hit a record $69,000, many investors were lured into the markets more by profit margins and less by the inherent equity of digital assets. 

There was a lot of groupthink, and criminals lured eager investors into their exchanges and airdrops, only to have the rug pulled out from under them. Some mixed customer deposits with company profits, while others destabilized their stablecoins. Among the shady dealings, billions of investors’ dollars disappeared – as did some criminals [1][2]. 

Tulipmania

During the Tulipmania phenomenon in Holland during the 1630s, tulips became a coveted status symbol for their vibrant colors and stripes – some being purchased for six times the average annual salary.

The flower’s high price gave it the perception of being inherently valuable, but the fact that the flower would fade and die meant that its economic utility was in its viability to be quickly resold on the retail market. When cost surpassed demand in 1637, the tulip market crashed.

Likewise, digital assets have risen astronomically in perceived value only to fall when their utility is no longer viable. Take NFTs, for example. Data from NFTGo shows that NFTs were consistently traded quickly, far more than being held long-term during 2021. By Jan. 2022, trades and holds reached their widest delta, with trades exceeding holds by 25%. 

This activity suggests that, like Dutch tulips, they are not assets that grow in value over time; they will fade and die, and investors know this. So, to make a profit, they must be resold quickly on the retail market. Thus, the trades exceeded holds by a wide margin throughout 2022. Furthermore, these quick flips have caused a debate among traders over removing royalties.

The South Sea Bubble 

Britain’s South Sea Company in 1711 is a forerunner of crypto and NFTs promoted by celebrities today. The company was established to ship commodities from South America, with shares sold to pay off the national debt. 

Well-known figures like Alexander Pope and Sir Isaac Newton invested in the company. Their notoriety influenced much of Britain’s middle class and even some clergy to invest, but investors unwittingly paid premiums on a stock that was spent on the national debt, not imported assets; therefore, the South Sea Company could not return the investment and by 1720 the bubble burst. 

Today, social media influencers like Logan Paul and the erstwhile wonderboy of crypto, Sam Bankman-Fried, baited many into their schemes. Paul’s CryptoZoo airdrop and the downfall of Bankman-Fried, have cost investors dearly. Bankman-Fried even hired Tom Brady and Larry David to promote FTX. Much like the South Sea Company, investments were spent elsewhere, not on things that would yield a profitable return.

Misplaced trade value

Crypto and NFTs are not the end-all-be-all of blockchain technology. The greatest application of the blockchain is not in digital art or finance; it’s in its ability to reshape how data is stored and owned. The blockchain is the singular divide between one’s personal data being stored in data silos by giant tech companies and owned by the individual on a distributed ledger. 

That difference has many applications in the marketplace, but cryptocurrencies and NFTs have taken the spotlight for their short-term trade value. Nothing is wrong with crypto and NFTs, but misplaced trade value has led investors to send money hand-over-fist to criminals. 

Digital assets are susceptible to over-pricing, just as Dutch tulips 400 years ago, and celebrities have promoted them as fantastic investments, just as the South Sea Company was by Pope and Newton in their day. 

In both instances, trade value was misplaced: tulips were sold as long-term valuable status symbols, but their actual value was realized by being resold. The South Sea Company was sold as yielding dividends from South American commodities when it only yielded dividends from other investors buying into the company to raise its stock price.

Investors need to consider lessons from history to make smarter investments. Blockchain investors must ask themselves: what is the type of value I am investing in? Perception or utility? Both are worth investing in, but they must never be confused with each other in any market and in every age. Groupthink is no substitute for DYOR.