The tulip fallacy and its connection with cryptocurrency

IF you have been in the cryptocurrency space for any time at all you will likley have heard the argument from objectors that cryptocurrencies run up is nothing other than a bubble. 

This argument is often made with reference to the tulip bubble which occurred during the 1600’s in the Netherlands. The argument will often go something like this:

“We have never seen anything like this before the only thing comparable to cryptocurrencies is the tulip bubble and we all know how that ended”

This is often posed as one of the “many” reasons cryptocurrency in the end wont work, or at the very least will lead to its fading into obscurity.

It fails to touch upon any of the interesting or unique aspects of cryptocurrency, perhaps because criticizing a decentralized means of payment free from any central authority actually requires some mental effort.

But what does this argument get right or is there any weight to its claims that the same bubble is occurring within cryptocurrencies?

Firstly during the 1600’s tulip’s did reach astronomical prices, with some rare tulip bulbs selling for 10 times the annual income of a skilled craftsman. Similarities can be drawn from that alone to cryptocurrencies, looking back at 2017 the entire market did see an extravagant run up in price.

However what people fail to mention is the serious lack of data on the price of tulips during this period. Many of the sources cited are from very bias curators, most data available comes from anti-speculative pamphlets by “Gaergoedt and Warmondt” written after the bubble popped.

Therefore the overlaying of the bitcoin price chart on top of the tulip bubble prices from the 1600s tells us very little when the data is observed more critically.

One of the key comparisons and often the least addressed is the fact that anyone could participate in the tulip trade, similarly anyone can participate in trading cryptocurrencies. According to the Scottish journalist Charles Mackay the tulip bubble was likely due to the participation of an entire nation.

He said: “the population, even to its lowest dregs, embarked in the tulip trade”

It it this point that strikes the closest similarity with cryptocurrency, everyone even those considered the “lowest dregs” of our society are free to participate in this space. The barriers to entry are slowly being dissolved to include everyone from the poorest to the most developed nations across the globe.

This similarity is rarely ever drawn when talking about cryptocurrencies in relation to the tulip bubble, even though it appears to be the most relevant.

 

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