Market Health

Why Today’s Crypto Craze Isn’t Like the Infamous Tulip Mania

We can say that fundamentals and technicals drive the action in stocks.

And we can debate which of these is the most important metric to zero in on.

But in reality, the markets reflect investors’ emotions and current views of the future.

The markets are fueled by people. And people are irrational as well as prone to fits of despondency and mania.

This is why I’m an avid disciple of behavioral economics and the investor cycle of emotions.

The Cycle of Market Emojis

We know that when euphoria is at its peak, the markets – or an individual investment – are in their most dangerous position.

But misidentifying euphoria can cause investors to miss out on true moneymaking opportunities.

The Mother of Speculative Bubbles

From 1634 to 1637, fortune hunters in Holland got trapped in the most infamous speculative bubble ever: the tulip mania.

And for nearly 400 years, it’s served as a warning to investors.

As the story goes, tulips became fashionable for wealthy Dutch merchants. But certain bulbs produced unpredictable, “broken” color patterns. And they became highly sought after.

People began collecting tulip bulbs and speculating on them. Then stock traders joined the game. All of a sudden, prices rocketed, eventually exceeding laughable amounts. A single bulb would sell for more than a worker’s annual income or even a house.

But, of course, like all speculative bubbles, this burst.

Since then, every time an asset takes off, the lessons and warnings of the “tulip mania” are waved about.

But sometimes, it’s used as an argument in a scenario that doesn’t necessarily apply.

Cryptocurrency – specifically Bitcoin – is one of those instances.

The Next Facebook

Bitcoin is the best-performing asset class of the past decade.

Let me repeat that… the past decade.

And it’s outperformed the Dow Jones Industrial Average, gold, the Nasdaq Composite, the S&P 500 Index and Tesla (Nasdaq: TSLA), which makes for quite a visual.

Bitcoin vs DJI, GLD, Nasdaq, S&P and TSLA Since September 2014

There are now more than 100,000 accounts that hold more than $1 million in Bitcoin. And there are at least a dozen cryptocurrency billionaires.

But despite its run and the wealth it has generated, Bitcoin is continually compared to the tulip mania of the 1600s.

Even Bloomberg went as far as to call Bitcoin “the tulip mania that refuses to die.”

But I think that couldn’t be further from the truth.

Now, when cryptocurrencies first emerged, there was plenty of reason to be skeptical. “Blockchain,” “hash rate” and “reward halving” were alien terms. Then there was the idea that a nonfiat digital currency would replace our paper dollars. It felt nonsensical to many, like forcing a Gen Z to watch a Looney Tunes cartoon.

And it still feels that way.

But over the past several years, the landscape for cryptocurrencies has materially changed. This isn’t speculation on tulip bulbs.

There are moments of euphoria and mania – every market and asset has them. But at this point, cryptocurrencies have to be recognized as established assets.

I would even go a step further and argue that cryptocurrencies aren’t going to be mainstream… because they already are.

We’re now all familiar with cryptos – even if you never wanted to be. And the largest cryptos are tracked right alongside the Dow, Nasdaq and S&P 500 on financial news programs and sites.

Not to mention the fact that several companies, like Etsy (Nasdaq: ETSY), The Home Depot (NYSE: HD), Microsoft (Nasdaq: MSFT), Overstock (Nasdaq: OSTK), PayPal (Nasdaq: PYPL), Starbucks (Nasdaq: SBUX) and Whole Foods, accept Bitcoin as payment.

Square (NYSE: SQ) patented a crypto payment network several years ago.

Amazon (Nasdaq: AMZN) and Walmart (NYSE: WMT) – the two largest retailers in the world – are looking for experts to head up cryptocurrency products. That’s a signal they may start accepting Bitcoin before long.

But as inventor and marketing personality Ron Popeil might say, “Wait… there’s more!”

Apple (Nasdaq: AAPL), JPMorgan Chase (NYSE: JPM) and plenty of other Fortune 500 companies are hiring for crypto positions.

I believe every investor should have some exposure to crypto, whether through tokens, exchange-traded funds or small cap stocks.

The rise of cryptocurrencies isn’t like the tulip mania of the 1630s. That’s a fallacy.

This moment in crypto’s history is similar to the rise of social media platforms in the late 1990s and early 2000s. The reaction from the naysayers is very similar. But today, these sites are integral parts of our lives and businesses.

The more established cryptos – Bitcoin, Ethereum, Ripple and Cardano – are separating themselves from the rest of the pack: the never-weres, jokes and hoaxes. And in another 10 years, these may be as ubiquitous as Facebook (Nasdaq: FB), Instagram, Twitter (NYSE: TWTR) and Snap Inc. (NYSE: SNAP).

That’s an upside any investor would be foolish to not want a piece of.

Here’s to high returns,

Matthew

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