Did you know? A few Dutch people sold their houses just to buy tulips as a status symbol around 1636-37.
Tulipmania is a famous example of a major economic bubble in the 1600s. In the Netherlands, people began buying tulips in large quantities, driving their prices to incredibly high levels. A financial bubble occurs when the price of an asset, such as stocks or real estate, rises rapidly and significantly exceeds its intrinsic value.
Tulips looked very different from any other flower in Europe when they first arrived in the 16th century through the spice trade routes. Their bright colors and unique look made them very popular with the wealthy people in the Netherlands.
As more people wanted tulips, the prices went up even higher. This was one of the first market bubbles caused by herd investment.
In finance, herding happens when investors follow what everyone else is doing instead of making their own decisions based on analysis. The rarest tulip bulbs went for up to six times the typical person’s yearly pay during the peak of the market. At the height of the bubble, tulips sold for approximately 10,000 florins (currency of the Netherlands from 1434 until 2002), which equaled to the value of a mansion on the Amsterdam Grand Canal.
The finest tulips may cost as much as $750,000 in today’s currency, with a single bulb costing anywhere from 4,000 to 5,500 florins. You can get 4 tuns of beer for 32 florins. That’s around 1,008 gallons of beer. This means that the best of tulips cost upwards of $1 million in today’s money (but with many bulbs trading in the $50,000–$150,000 range).
People started selling tulip bulbs, and by late February 1637, the prices began to drop. Suddenly, there weren’t enough buyers to keep prices high. Buyers said they couldn’t pay the high prices they had agreed on, and the market crashed. This led to panic and a quick, disastrous collapse.
The value of tulip bulbs plummeted, leaving many investors with worthless tulips. This was a classic example of a speculative bubble that eventually burst. The fact that customers first bought bulbs on credit with the intention of repaying the debt when they sold them for a profit was what caused the steep drop. But when the prices started to drop, owners were forced to sell their bulbs for whatever amount, which also meant filing for bankruptcy.
The tulip bulb bubble burst due to investor speculation and herd mentality, which resulted in significant losses—the bulb lost over 90% of its worth. The bubble burst by the end of 1637.
Similar to previous bubbles, this one taught us that it is crucial to accurately assess the intrinsic value of investments. Overpriced assets are prone to rapid devaluation, which can cause significant financial losses. And these market bubbles are driven by speculation and can burst suddenly.