What Is ‘tulip mania’?
A week after budget 2022-23 proposed 30 per cent tax on gains made from cryptocurrency trades, Reserve Bank of India (RBI) governor Shaktikanta Das termed it as a “threat to macroeconomic and financial stability”.
Tulip mania was a period when tulips were recently introduced and bought in large quantities by many people. This caused tulip prices to shoot up. They were sold at prices higher than skilled workers’ income. After reaching a peak, tulip prices crashed, leaving tulip holders bankrupt. It was the first major economic bubble.
- Announcing the bi-monthly monetary policy outcome, Das cautioned investors by invoking the 17th century ‘tulip mania’ — which is widely considered to be the first financial bubble.
- The RBI governor said that investors must remember that cryptocurrencies have no underlying, not even a tulip.
- The central bank has always maintained a strong stance against private digital currencies. It had banned the banking system from aiding such trades, which was struck down by the Supreme Court in 2020.
- Cryptocurrencies are said to originate or ‘mined’ using complex algorithms built on the blockchain platform but critics say it lacks the ‘value’ of legal tender whose supply is regulated.
- The ‘tulip mania’ of the 17th century is often cited as a classic example of a financial bubble where the price of something goes up, not due to its intrinsic value but because of speculators wanting to make a profit by selling a bulb of the exotic flower.
- It is also known as the Dutch tulip market bubble and occurred in Holland during early to mid 1600s. It was one of the most famous market bubbles and crashes of all times.
- Speculations drove up the value of tulip bulbs and they traded for an extensively higher price.
- In today’s context, it serves as a parable for the pitfalls that excessive speculation can lead to.