They say “history doesn’t repeat itself, but it often rhymes.” Nowhere is that more evident these days than with cryptocurrency investors, particularly those wagering on digital assets like Dogecoin (DOGE-USD).
Indeed, when it comes to perhaps the most famous historical lesson of them all — the Dutch tulip bulb mania back in the 1600s — extreme crypto speculators should pay particular attention. The implications for Dogecoin and any other virtual currency are much more startling than many, if not most, folks realize.
Of course, the general comparison between cryptos and tulip mania have long been dissected. Both markets enjoyed an early bout of investor sentiment, which then spread to others. Eventually, the number of people participating expanded exponentially, leading to an unmitigated furor. In the tulip bubble’s case, prices reached a point where no one was willing to pay.
After that, the writing was on the wall. Countless investors lost everything, sending the Dutch economy into a tailspin. For cryptos and especially meme-driven assets like Dogecoin, it appears that we’re on the same path. But then, critics of this historical comparison note that while the events leading up to bubble bursting may be accurate, some key details are not.
The Dutch economy didn’t collapse, for one. And not everyone was bidding tulip bulbs to unrealistic levels; thus, the broader impact was limited. That’s according to author Anne Goldgar, who conducted extensive and exhaustive research on the topic.
It turns out that in reality, those who participated in the speculative market for tulips could afford the collapse that ultimately materialized. They weren’t happy about their losses but it wasn’t necessarily life altering. Sort of like an early version of an “accredited investor.”
So, does that mean Dogecoin is off the historical hook?
Dogecoin Fact May be More Dangerous than Fiction
Interestingly, that tulip mania only affected relatively few people is actually a cause for concern for Dogecoin and other crypto believers, not a source of relief. Per a Pew Research Center report, only 16% of Americans have ever invested in or otherwise used virtual currencies.
For all the pomp and circumstance involving the crypto complex over the trailing year, 16% is a remarkably low figure. And it’s worrisome for Dogecoin because it proves you don’t need everyone to go nuts for an asset class to evaporate.
Even more telling, the Netherlands during the time leading up to the bubble bursting featured similar dynamics to the U.S. in modern times.
- The Netherlands experienced major demographic shifts from its war of independence from Spain. Likewise, our country is going through a demographic evolution amid countless wars across the globe.
- A robust exchange of cultures and ideas flourished during post-war Netherlands as the country became an international trading hub. Similarly, the internet facilitated the influx of fresh concepts for American audiences.
- During the 1630s, the plague arrived in Europe, cynically putting money from dead relatives into the hands of Dutch traders, who then bought more tulips. Over the last two years, the coronavirus forced the federal government to backstop the American labor force, some of whom subsequently used stimulus checks to buy Dogecoin.
I knew about the connection between unsustainable prices between tulip bulbs and cryptos — who doesn’t? However, I had zero clue that the Netherlands during that time also experienced similar social dynamics that we’re going through now, including the new normal!
Come on, folks — you got to admit, that’s uncanny.
But it’s also worrisome. If history repeats itself or somewhat rhymes, Dogecoin and other cryptos could be facing a steep correction.
Ignore History at Your Own Peril
During the run-up to tulip mania’s peak, some participants who managed to step away from their euphoric state began to sense that valuations had gotten out of hand. Further, per a Barron’s article, “tulips, which once seemed rare and exotic, were actually easy to grow and propagate.”
And I think that’s the kicker. At first, cryptocurrencies themselves were rare because obviously, it all started with the original blockchain. Today, there are 17,450 cryptos available for trade. Most of these surely are destined to fail. There’s just not enough money to go around supporting each one with any level of robustness.
That’s four major correlations — aside from the shooting price story that everyone knows about — between tulip mania and cryptos. I’m not guaranteeing anything with this observation. However, I suspect we ignore this lesson at our own peril.
On the date of publication, Josh Enomoto held a LONG position in DOGE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
