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#5 Tulips vs Bitcoin

History has it that in the Netherlands in early 1600's, tulip bulbs became a hot commodity! The steep rise in the value of the bulbs being traded was termed a 'mania', and at one stage a bulb was said to be worth 10 times more than a skilled craftsman's annual salary. Clearly this doesn't make any sense, but people kept buying.

This crazy notion is called 'speculation', where people buy an asset with the belief they can sell it in future for more than they paid for it.

Speculating is normal, and makes perfect sense for investing, the issue with it is when uneducated people get sucked into hysteria of buying in to something they don't understand, or an asset which actually has no real value behind it. Seriously, who actually needs a tulip?

Naturally, tulip mania came to an end when it's bubble burst. People wanted to sell and get their returns, however the supply / demand equilibrium falls as supply outstrips demand. We can look back and ask "what the fuck were they all thinking?"

To me, Bitcoin is looking like it's going to have a drastic fall too. Bitcoin is a crypto currency which central banks don't have control of. It is a clever invention, and the idea of it has enormous potential for the future. Over the last few months the price of it has gone crazy, where 1 x Bitcoin is worth now $22,000 NZD. The hype of it is enticing people with no investment experience to gamble on its future value. Really though, what is behind this asset? Unlike fiat money we use today, Bitcoins value has no backing from Govt. So the price of it is only driven by demand, and looks very much like the story about tulips all those years ago.

This image below is from Jean-Paul Rodrigue's stages (or phases) of a bubble chart. It illustrates a flow of what will likely happen to the price of bitcoin.

Bitcoin is a great concept; no doubt, but the value underwriting the investment is pure risk.