If I was living in Holland in 1634 and I had a spare 4,000 guilders, I had a choice to make. I could purchase a mansion on the Amsterdam Grand Canal or I could invest in a tulip.
Now the mansion option had some intrinsic value. There was stonework and doors and roofing and, well, all the things that made up a mansion in 1634. Each item had some value on its own and when manpower was used to make it in to a home, it had increased value.
The tulip had no intrinsic value but it looked pretty and proved that I had money. And although I may expect the price of my mansion to increase if I were to sell it in a few years, I probably would not become fabulously wealthy when selling it.
The tulip on the other hand gave me dreams of wealth and prosperity with no requirement for any work. Just buy the tulip and then sell it at some stage later.
Even if you aren't familiar with tulip mania, I am sure you can guess how the story ends. In February 1637, the price of tulips collapsed dramatically with many investors ruined by the collapse. The tulip itself had not changed from one day to the next but the perception of the speculative value associated with the tulip had changed.
You might also like:
The modern-day equivalent, according to none other than Bill Gates, are cryptocurrencies and non-fungible tokens (NFTs). The technology behind both is fascinating and I could bore my readers senseless with the explanation of blockchain and the history of how we have arrived at this point in time but back to Bill.
He was recently quoted as saying that NFTs and cryptocurrencies, in his opinion, are based on the "greater fool theory."
That theory is a financial concept that loosely states that even overpriced assets can make an investor money provided you can find a "greater fool" to sell them to.
Think of a baseball card. The intrinsic value of a piece of thick paper with a small amount of ink on it is a few cents at best.
Even overpriced assets can make an investor money provided you can find a "greater fool" to sell them to.
But if that picture happens to be of Mickey Mantle and there are a limited number of them available, the value someone is willing to pay suddenly jumps to millions of dollars.
The old joke is that something is worth whatever someone is willing to pay for it but the danger for an investor is you need to find someone else in the future that is willing to pay more than you paid.
If you believe the supporters of cryptocurrencies, the strength of the entire concept was going to be a way for people around the world to trade goods and services in a secure way without some pesky government sticking its nose in and wanting to regulate and control the currency.
Of course the risk with cryptocurrency is that there is no pesky government trying to stabilise and regulate the currency. Its greatest strength is also its greatest weakness.
It also seems a convenient way for those who operate outside the law to exchange funds anonymously and no doubt avoid any taxation on transactions.
A bit like a friend who plays the poker machines and tells you about their wins but not their losses, I hear from friends who have made money on cryptocurrencies but I haven't analysed their entire financial transaction history.
Ultimately, I think that cryptocurrencies are being used more like tulips and less for pure financial transactions.
Tell me how much money you have made with NFTs or cryptocurrencies at email@example.com.
Check out how you can save with the latest deals on business, home office and technology with discount codes from Australian Coupons.
Sign up for our newsletter to stay up to date.