With the NFT market in a correction, individuals point to Tulipmania as an example of what could be happening. But can we really compare the current NFT market trend with Tulipmania?
With the NFT market in a correction, individuals quickly point to Tulipmania as an example of what is happening to the markets. But can we really compare the current NFT market trend with Tulipmania? What actually happened then? And how the NFT market can learn from this historical event? Let’s go back in time & dive in!
The first six months of 2022 have been tumultuous for the NFT market. They could easily mark the beginning of a defining period in the market’s development. Prices for well-known NFTs are dropping back to their floor prices, while panic grips investors and the market moves out of bull territory into a bear market. What investors do now will determine the future stability and longevity of the market.
As it stands, the volume of both buyers and sellers has dramatically decreased over the past month. Investors are becoming more cautious, and major projects have lost a significant amount of value. Still, there does seem to be a solid foundation of buyers and sellers who have remained active and are ensuring that the market continues to move forward despite the setback.
Some economists are comparing the current NFT market trends with Tulipmania. What is Tulipmania? What does this mean for the market? Let’s dive into the popular myths surrounding Tulipmania, to understand what actually happened, and how it actually compares favorably to the current state of the market.
“…the idea that tulipmania caused a big depression is completely untrue. As far as I can see, it caused no real effect on the economy whatsoever.” – says Anne Goldgar, professor of early modern history at King’s College London and author of the book ‘Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age’, in an article for History.com)
Tulips were first introduced to The Netherlands in the 15th century from the Ottoman Empire. The beautiful flowers enchanted the Dutch populace, quickly becoming a popular status symbol for wealthy members of the Dutch Elite. The flowers themselves were short-lived, but their bulbs, which would return yearly, made it easy for the elite to trade and grow their collection of exotic flowers.
Rapidly, industries began to develop around the flowers. Horticulturalists would work to create new and unique tulips and trade these rare bulbs to wealthy investors. As the flowers became more popular, prices for these rare flowers rose, and individuals were swept up in speculation over the value of these bulbs.
‘Tulipmania’, is a term coined by Scottish author Charles MacKay in his piece: Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. Published 205 years after the incident in question, Mackay’s piece told of people rising from rags to riches, only to have their wealth stripped away as the entire Dutch economy collapsed. He wrote of a sailor who, mistaking a rare bulb for an onion, ate it for lunch. Upon discovering his mistake, he claims that the man was charged with a felony and thrown in prison.
The only problem is that none of this happened.
Historian & author Anne Goldgar spent years scouring through records from the time period in search of any sign that Tulipmania had resulted in any economic downturn or resulted in its investors being left destitute as MacKay claimed.
As with many novel products that become popular quickly, the market reaches saturation as sellers attempt to capitalize. Farmers who may have only been able to get their hands on a few bulbs due to their price, would turn around and cultivate the flowers en masse. As more flowers entered the market, the excessive prices that a select few of the wealthy were paying for the tulips became unsustainable and a market correction took place. This resulted in tulips returning to their true market value, and it was no longer possible to buy or sell tulips for the exorbitant prices they’d been at previously.
Fortunately, nearly all of the investors who had purchased the flowers were wealthy, and the loss of the flower’s value did little to affect their bottom line. Goldgar has found no evidence of anyone who was left bankrupt as a result of the market crash. Instead, it was a rush on an exotic luxury that caused the prices to temporarily break out of their actual market value with a limited, if any, impact on the overall Dutch economy.
This, of course, does not stop economists from utilizing this as an example of brief speculations resulting in economic downturns. Whether or not the event happened, it does make for a compelling cautionary tale regarding the risks of investing in a new product heavily.
So instead, let’s take a look at what happened after the Tulip market crashed when horticulturalists and investors were forced to rethink their market strategy. Looking back to 1637, even after the Tulips lost a majority of their short-term value, the flowers themselves never went out of style. Instead, they built a far more stable economy surrounding their love of flowers.
Currently, the Netherlands produces 68% of the flowers sold worldwide, and their flower markets make up 10% of their GDP. The cost of flowers has remained far lower than during the time of the initial rush, but because of this lower price, has managed to boom into an industry that is stable and a safe investment for investors of all backgrounds.
Though a return to the previous market value of NFTs might seem to be catastrophic to those hoping to make quick money off of the sales of NFTs, for the majority of investors it is an opportunity to ensure the long-term sustainability of the market. Returning NFTs closer to their floor price, it allows for new projects and smaller investors to join the market without the fear of losing large sums of their income.
Ultimately, expanding the pool of investors and creating an industry that is not built entirely upon speculation and a desire to make quick, short-term deals to make large sums of money quickly, will result in more market stability overall. Crypto and NFTs in turn, have been seen as something only a niche collection of investors and artists are willing to take a risk on. It’s exciting and it might lead to some individuals earning massive sums of money, but the model is unsustainable.
Ultimately the goal of any industry, whether you’re selling Tulips or NFTs, should be to create a market that remains as reliably lucrative as possible for its investors. Creating a sustainable industry with long-term goals for investors of all backgrounds will create an environment that is conducive to expansion. This new environment will create room for artists to experiment and small-time investors to invest in projects without as much risk of massive financial loss. Providing these opportunities and stability will increase the number of artists and investors and do wonders to boost the markets’ credibility as a whole.
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