Tulips and Token Mania

Consider the tulip. This is Semper Augustus, the flower behind 17th century Tulip mania. Ordinary tulips are solid in color and were sold by the pound, but the multicolored ones commanded ridiculous prices because they were rare. At peak demand, a Semper Augustus bulb went for 6,000 guilders, or two years’ salary for a wealthy merchant.

Ah, such beauty and vigor! Such grace and debonair! Such radiance and majesty could only have come from the wings of an angel, who perhaps flew too close to the sun and caught on fire and died and came back to earth in this glorious bloom!

But what if I told you that the stripey color was caused by a virus?? That’s right, the Tulip maniacs were really chasing a byproduct of the mosaic virus, a disease transferred by aphids that affects pigment distribution in the bulb. The mosaic virus is the same disease that destroyed tobacco crops in the late 1800s. Those flaming petal patterns are about as marvelous as cowpox.

The pathogen-induced colors propagate through bulb division, but multicolor tulips were scarce because the mosaic virus weakens the plant to the point where its bulbs cannot propagate. Just look at the Semper Augustus: the flower is so messed up it can’t even hold its head together like a proper tulip. Semper Augustus became a diseased dead-end and no longer exists today.

Tulip bulb propagation. The bulb splits, like a garlic or a blockchain.

The tulip bubble was more confined than stories suggest. Prices rose on a scarce commodity, which is normal. After a price correction in 1636, a number of Dutch mayors found themselves on the losing end of some futures contracts. Unwilling to take a loss, the officials declared that futures contracts were in fact options, and could be canceled for a small fee. They effectively gave themselves a bailout.

Nov 1, 1636 was the original start date for contract cancellations, but the Dutch officials secretly changed the start to Dec 1 so they could have an extra month to trade on that knowledge.

After tulip contracts became unenforceable, traders wrote all sorts of deep out-of-the-money call options. The options were longshot bets that didn’t materialize, but somehow the Tulip Bubble came to be defined by their unexercised strike prices.

People keep comparing the cryptocurrency madness to Tulip mania. Sure, they’re similar in that market participants are treating a commodity flaw as a feature. And yeah, there are nonstop stories of how much blockchain projects have raised through token sales — over half a billion dollars this year, supposedly!

But the money is about as real as unexercised tulip options. Tokens aren’t sold for dollars; they’re sold for ether. It’s more accurate to say that the token offerings have collected 1.6 million ETH. A year ago, the same amount of ether was worth only $24 million (ETH is up 4900% this year).

Today’s impressive half-billion dollar value is an impractical conversion — You can’t liquidate 1.6 million ETH without crashing the market. The two biggest exchanges only have 4.4M and 3.6M apiece in cold storage.

I suspect that puffy token sales are primarily driven by early speculators reinvesting paper gains — maybe last year’s bailout convinced them that tokens are a risk-free place to park their profits. Still, it’s a really a small parking spot. The total amount of ether funneled into tokens is but a fraction of the 11.8M ETH dumped into the DAO.

An illiquid market where gamblers trade large paper gains for out-of-the-money options doesn’t create a bubble, but it only takes a few obnoxious voices to get people freaked out about one.

See Also:
Thompson, Earl A. The tulipmania: Fact or artifact? Journal of Public Choice, 130, 1, 2007.

3 thoughts on “Tulips and Token Mania

  1. The more I reread this the more wrong this reads. Firstly, options become deliverable under certain conditions. Currency is always deliverable at some undetermined forward rate. Key difference. 11M ETH today represents a very different USD figure. Don’t get me started with the non-definition of a bubble here.

  2. I’m not sure the rise in ETH explains the motivation for investing in other tokens. It actually may go the opposite way: ERC20 token prices are often denominated in ETH, which invites a comparison that for most isn’t that favorable. Or, to look at it from the seller’s point of view: If you were doing a token fundraise, would you rather have $2M at $30 ETH, or $20M at $300 ETH?

    What if ETH crashes? I think most assume that will close the window for token offerings, but, assuming everyone legitimately involved in the token markets is long ETH, it may be the other way around.

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