As Bitcoin approaches $1,000 are investors suffering from tulip mania?

Comparisons between the dramatic ascent of Bitcoin and the tulip bulb mania that gripped 17th century Europe aren't new. They were made by UBS' Art Cashin before the currency popped in April.

It did - dropping from $220 to less than $80. Fans of the cryptocurrency would always tell you that this time things are different - that Bitcoin is the shape of things to come. Now the price of Bitcoin is back up, and approaching $1,000.

(Bitcoinity)

Much of their case is convincing. Digital currencies have some strong advantages over those controlled by governments, and even if Bitcoin doesn't last other alternatives are already emerging.

But it's hard to disagree that the charts below are eerily alike, showing the similarly meteoric rise of tulip bulb prices in the 1600s and the alternative currency. Tulips too appear to have seen a small correction before the bubble burst in a dramatic fashion.

 

It's a fallacy to argue that either tulips or Bitcoin have intrinsic value - value is subjective, not innate - but they certainly both have qualities that many desire.

When tulips were introduced they were a novelty, not seen before and prized for their beauty. Bitcoin has very different qualities, bringing advantages over traditional means of exchange - it can't be taxed, it's easily moved across borders without high transfer fees, and there's no central bank which could devalue the currency.

We may be seeing a boom in Bitcoin - but don't be tricked. Subjective value never becomes detached from a "true" objective worth. No such thing exists. But when people reassess what they consider a commodity to be worth, prices can crash.

As Bitcoin appears to be climbing towards the psychologically significant $1,000 level for the first time - it's worth remembering that one tulip bulb was traded for 12 acres of prime Dutch farm land during the height of the mania.

Even if Bitcoin's price does crash back down to earth its qualities will remain precious to many - just like the beauty of the tulip. The price of Bitcoin may be wrong, but a currency free of state manipulation will always have fans.

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