Bert Leffers & Hayo Heerink: Cryptocurrencies, the tulip bulb and the story
Deze column is oorspronkelijk geschreven in het Nederlands. Dit is een Engelse vertaling.
Can the tulip mania of the seventeenth century be compared to today’s crypto hype? Or is this one of those moments when financial history, whilst not repeating itself, does rhyme?
By Bert Leffers, independent investment consultant, and Hayo Heerink, former investment strategist at pension funds
Tulip mania played out in taverns and on auction slips, whilst the crypto hype unfolds in apps, wallets and on Discord channels1. But beneath the surface, they share the same driving force: the narrative that becomes more powerful than reality. And that is precisely where the narrative fallacy comes into play: our stubborn tendency to construct logical, neat stories in hindsight about markets that are, in reality, chaotic, human and unpredictable.
Tulips: the first major investment story
Tulip mania was not a rational market phenomenon, but a social one. Tulip bulbs were traded as if they were productive assets, whilst in fact they did nothing but… sit in the ground. The value lay not in the bulb, but in the story that grew up around it: the tulip was rare, coveted, rising in price, and above all, wanted by everyone. Until the story took a turn. Not because the tulips changed, but because the collective imagination changed. The market collapsed the moment the narrative broke down.
Crypto is not a tulip bulb. There is technology behind it, infrastructure, new forms of ownership and transactions. But the way people invest in it sometimes bears a painful resemblance to 1637. The conviction that ‘this time it’s different’, the hunt for quick riches, the social pressure. The stories that rise faster than the underlying value. And here too, the market is driven not only by technology, but by narratives: Bitcoin as digital gold, Ethereum as the world computer. Stories that sometimes come true, but more often merely seem true.
Narrative fallacy (as described by Kahneman2, among others) explains why, in hindsight, we always think it was logical. We reconstruct the chaos into a story that makes sense. But that story makes sense mainly to ourselves. Tulip mania is now often presented as a lesson in mass hysteria. That is a retrospective reconstruction. Just as retrospective crypto analyses can perfectly explain why a token rose by 300%, whilst nobody knew it at the time.
The real parallel is that markets are not driven by objects, but by people. The tulip bulb was not irrational. The people behind it were. Crypto is not irrational. The people behind it sometimes are. Both markets show that:What investors today can learn from 1637
- valuation without fundamentals is vulnerable,
- stories are stronger than spreadsheets,
- liquidity disappears when the story breaks,
- the masses are always too late, both at the peak and at the bottom.
Examine the fundamentals, not the narrative. A tulip remains a tulip. A crypto remains a crypto, unless it generates real cash flows or utility. Be wary of explanations that sound too good to be true. If an analysis is too neat, too logical, too perfect, it has probably been constructed with hindsight.
Recognise that FOMO is not a strategy. It is an emotion, and an expensive one at that.
The tulip mania was not an incident, but a mirror. Crypto is not a repeat, but an echo. And the narrative fallacy is the voice that tells us we could have known it all. Those who understand this do not invest in stories, but in value.
1. Discord channels (in the context of crypto) are thematic chat rooms within a Discord server where a community shares information about a specific coin, project or trading strategy.
2. Daniel Kahneman, Thinking, Fast and Slow.