Bitcoin vs. Tulips? Why Bubble Analogies Are Disingenuous

JP Morgan boss Jamie Dimon had a lot of things to say about Bitcoin last month and none of them were good. In amongst swipes about the cryptocurrency being ‘a fraud’ and best suited to murderers and North Koreans, Dimon also offered his audience a quick history lesson into the bargain. Referencing the so-called 'tulip mania' that gripped Holland in the 1600s, Dimon confidently asserted that Bitcoin was ‘worse than tulip bulbs.’

Although over 400 years in the past, tulip fever still serves as a useful cautionary tale for investors today. As the Dutch Republic flourished in the early 17th century, tulips became a much-prized status symbol and the bulbs from which they grow began to command high prices.

As speculators waded into the fray the price of these bulbs soared to many times the average wage and investors poured money into the market. Unsurprisingly, this state of affairs couldn’t last and prices eventually plummeted, leaving many speculators ruined. The whole episode is thought to be the first (though by no means the last) economic bubble ever seen.

Speculation or Investments?

So, is Dimon’s likening of Bitcoin to tulip bulbs a fair comparison? Are we witnessing a rerun of the collective madness that saw fools and their money soon parted? Whilst there are certainly lessons to be learned from the Dutch experience, Dimon’s analogy is out-dated amidst today’s radically different economic circumstances.

First and foremost, the tulip bulb craze rested on a commodity that was essentially worthless – they rose in value only because people were prepared to pay ever-higher prices for them. As the realisation set in that they had no further intrinsic worth, reality dawned and the price collapsed. Dimon’s argument that Bitcoins are similar is a specious one – there is a truth to it, but it ignores the wider picture.

Bitcoin’s worth is being demonstrated on a daily basis as an ever-expanding list of retailers and service providers begin accepting it as a form of payment. Its days of being confined to the dark web are long gone and, as the tenth anniversary of the banking crash and Bitcoin’s subsequent emergence draws near, it has entrenched itself deeply into the financial landscape. Like it or loathe it, Bitcoin is here to stay.

Genuine Use Cases

Much of the fluctuation and uncertainty that is currently associated with cryptocurrency markets is the result of attempts to regulate certain aspects of them. The Chinese ban on ICOs is a good example of this, but amidst this activity Bitcoin stands out ahead of the fray. The temptation for many is to lump all cryptocurrencies together as a Wild West frontier, whilst ignoring the fact that Bitcoin is already well established and happily accepted by millions (and counting) as a viable currency.

Dimon is not alone in his scepticism towards Bitcoin, but his argument seems largely based on the cryptocurrency’s skyrocketing price (currently well above the $5,000 mark) and fails to take into account its increasing adoption throughout the world.

His assertion that it is best suited to those in Venezuela amongst other places is an illuminating one, given as how it is serving as a virtual lifeline in a country long since failed by its government and banking system.

Conflicts of Interest Abound

The fears of the financial establishment (embodied by Dimon) are based fundamentally on Bitcoin’s position as a viable alternative to traditional currencies and its growing influence beyond the control of governments and banks. Labelling it as a bubble fails to appreciate modern economic realities that have been largely brought about by a deep public mistrust of the banking system.

There is no telling how high the price of Bitcoin will go and to what extent other cryptocurrencies will eat into its massive share of the market. Its price will continue to fluctuate and attempts by governments to regulate cryptocurrencies will have an impact in the long term. But the bubble analogy being thrown around is flawed and inaccurate.

Bitcoin has proved that it has a place in the financial sphere, whether the powers that be like it or not. Furthermore, the blockchain technology that underpins it is itself a revolutionary new force that will have massive implications in the very near future. This is no tulip fever,