TULIPMANIA FIRST FINANCIAL BUBBLE _ DUTCH TULIPMANIA EXPLAINED.mp4

Financial or economic bubbles are generated when the price of an asset becomes increasingly high, much higher than the actual value of it. Because of speculative demands rather than intrinsic value, the price of such assets inflates and the bubble eventually pops due to massive sell-offs that cause price to decline. When financial bubbles pop, they not only destroy wealth, but they can also hurt the economy with devastating consequences for those who did not even participate in the activity. Financial bubbles that often trigger economic crises seem to be happening more and more frequently. Over recent decades, several assets have created economic bubbles. The dot-com revolution in the 1990s was one of them, as well as the soaring US real estate prices that eventually led to the 2008 global financial crisis. But economic bubbles are much older than that. The first ever financial bubble that was recorded took place in the 1630s in the Netherlands. At the center of this bubble was an unusual asset, the tulip bulb. The bulb buried under the soil that will emerge as a beautiful tulip flower. This story of the first major financial bubble was named as Tulipmania. Tulips are native to Central Asia and Turkey. The name tulip came from the Turkish word for turban. The first tulips were brought to the Netherlands from Turkey in the 16th century. Due to its exotic look, the tulip became a luxury item and a status symbol in Europe. Carolus Clusius, a Flemish botanist, founded the Botanical Garden at the University of Leiden in the Netherlands and began to successfully cultivate tulips. This botanist made an interesting discovery. Sometimes tulip petals changed color and began sporting multicolored patterns. This mysterious phenomenon was called tulip breaking and it created spectacular flowers. This was a rare occurrence and it made the multicolored tulips much more valuable than the rest. Today we know that tulip breaking is caused by a virus that infects certain tulip bulbs and they're quite difficult to propagate. This variation was a catalyst causing a growing demand for rare broken bulb tulips, which is what ultimately led to the high market price. Other botanists began to cultivate tulips and because of their popularity, prices began to rise. As cultivation techniques improved, more people began collecting and speculating on tulip bulbs. The Dutch began to madly purchase tulips, pushing their prices to unprecedented highs. At the height of the market, the rarest tulip bulbs traded for as much as six times the average person's annual salary. A single bulb of tulip cost as much as 4,000 to even 5,500 florins, which meant that the best of tulips cost more than $750,000 in today's money. At the height of the bubble, tulips sold for approximately 10,000 guilders, equal to the value of a mansion on the Amsterdam Grand Canal. By 1636, the demand went so high that regular marts for sale of tulips were established on the Stock Exchange of Amsterdam. It was at that time that professional traders got in on the action and everybody appeared to be making money simply by possessing some of these rare bulbs. Indeed, it seemed at the time that the price could only go up, that the passion for tulips would last forever. People began buying tulips with leverage, using margined derivatives contracts to buy more than they could afford. In February 1637, the tulip bubble burst, buyers began to stop fulfilling their contracts, and the whole artificially generated craze came crashing down. A large part of this rapid decline was driven by the fact that people had purchased bulbs on credit, hoping to repay their loans when they sold their bulbs for a profit. Fortunes were lost overnight, and the value of the tulip took a plunge into the ground where it really belongs. The 1637 event gained popular attention in 1841, with the publication of the book Extraordinary Popular Delusions and the Madness of Crowds, written by Scottish journalist Charles Mackay, who wrote that at one point 12 acres of land were offered for a Semper Augustus bulb. Semper Augustus was the most prized and expensive variety in the Dutch tulip mania. Tulip mania still provides valuable lessons for investors today. Metaphorically, the term tulip mania is now often used to refer to any large economic bubble when asset prices deviate from intrinsic values.