How a sophisticated derivatives market—not flower mania—created history's most misunderstood bubble
Here's what everyone thinks they know about the Dutch tulip mania: In 1637, the Netherlands went collectively insane. People traded their houses for flower bulbs. A single tulip cost more than a skilled craftsman earned in a decade. Then the market crashed, destroying the Dutch economy.
It's a compelling story. A perfect morality tale about greed and irrationality.
It’s been discussed endlessly, and almost everybody thinks they know the story.
It's also mostly wrong.
The real story of tulipmania wasn’t really about flowers at all. It's about futures contracts, leverage, and market structure—the same forces that drive every speculative bubble from the South Sea Company to subprime mortgages to crypto.
The critical thing here is this: human nature is relatively impermeable. What I mean is that our ‘nature’ doesn’t really change much, from crisis to crisis. When you combine extremely high leverage investing with a debt structure that basically rewards risk taking, you get a bubble.
And understanding what really happened in those Dutch taverns 400 years ago might be the key to recognizing the next bubble before it rears its ugly head.
The Market Nobody Talks About
By late 1636, none of my distant Dutch relatives were buying or selling tulips per se.
They were trading promises of tulip bulbs—futures contracts that wouldn't settle until the flowers bloomed in spring. These weren't simple IOUs. They were sophisticated financial instruments with standardized terms, traded in what economists call a "windhandel" or wind trade.
Think about that for a moment. While we imagine Dutch merchants hauling wheelbarrows of precious bulbs through Amsterdam's streets, the reality was paper contracts changing hands in smoky taverns. The physical tulips were still in the ground, dormant for winter.
This wasn't flower (bulb) collecting. It was derivatives trading.
And the Dutch, at this point, had a markedly sophisticated financial system. More to come in the future on the rise of the Dutch - but to say that futures contracts at this point were a new innovation wouldn’t be accurate. The Dutch were already quite advanced in the utilization of complex and esoteric financial contracts.
Since this is the Timeless Investor, one quick educational note.
Futures trading can be traced all the way back to 1750 BC in Mesopotamia. Part of the Code of Hammurabi stipulated that goods and assets had to be delivered for an agreed-upon price at a future date. For goods and assets to be sold at that price, there needed to be a written (and witnessed) contract.1
In Japan, the futures markets can be traced back to the 1700s at the Dojima Rice Exchange in Osaka. By 1710, merchants were trading futures contracts based on the perceived future value of rice. The Dojima Rice Exchange is widely credited as the first modern futures exchange with all the hallmarks we'd recognize today: standardized contracts, central clearing, margin requirements, and licensed traders.
In medieval England, wool merchants used forward contracts extensively from 1200 to 1330.
Point being - not a “new” financial innovation per se.
What made it viral and dangerous we’ll discuss next.
The Leverage Machine
Here's where it gets interesting—and eerily familiar to anyone who lived through 2008.
Most tulip futures contracts required no money down. Zero. You could control thousands of guilders worth of tulips with nothing but your signature. The plan was simple: sign the contract in winter, sell it to someone else before spring delivery, pocket the difference.
Sound familiar? It should.
But wait, it gets better.
Many of these contracts included what we'd now call "non-recourse" provisions. If you couldn't pay when the bulbs arrived? You could simply walk away. The seller's only recourse was to keep the bulbs.
No wonder speculation exploded. You had unlimited upside with virtually no downside. It was heads-I-win, tails-you-lose on a massive scale.
The Tavern Trading Floors
The tulip futures market didn't operate through formal exchanges or guild halls. It happened in "colleges"—informal trading groups that met in taverns after regular business hours.
These weren't amateur hour operations. The colleges had sophisticated rules:
Standardized contract terms
Market makers who provided liquidity
Commission structures (typically 2.5% per trade)
Even primitive options strategies
Traders would gather, drink, and bid up contracts in ascending price auctions. Wine flowed, prices rose, and paper fortunes accumulated. Think Wolf of Wall Street, but with wooden clogs and smoky pipes!
The social dynamics were crucial. In these intimate settings, peer pressure and alcohol combined with financial speculation. Refusing to bid could mark you as either poor or cowardly. There’s a recurring thematic for you - human nature. Always rearing its head up in FOMO, Greed, Speculation, and the desire for quick profits.
The Professional Speculators
Contrary to popular mythology, ordinary citizens weren't mortgaging their homes for tulips. Court records and notarial archives tell a different story.
The major players were:
Wealthy merchants diversifying their portfolios
Professional traders who understood speculation
Market makers earning commissions on volume
Skilled artisans with disposable income
The bottom of the market—the sailors and chimney sweeps of legend—participated mainly through penny-ante bets in taverns, not life-destroying speculation. Think of them as the Robinhood traders of their era.
The Crash That Wasn't
On February 3, 1637, the tulip market collapsed. Prices fell 99% almost overnight. Actually, I’m not even sure 99% is accurate. The market completely fell out. There was no market.
But here's what the history books leave out: Almost nobody paid.
Remember those non-recourse contracts? When prices crashed, buyers simply refused to honor them. Sellers were left holding worthless bulbs—or more often, promises of bulbs that didn't even exist yet.
The Dutch authorities faced a choice: enforce the contracts and risk destroying thousands of merchants, or void them and mitigate the damage. They chose containment. In May 1637, they effectively nullified all tulip contracts, treating them as gambling debts rather than legal obligations.
The economy barely noticed. Dutch GDP didn't collapse. Trade continued. The golden age of Dutch commerce rolled on for another generation. The tulip "crash" was largely a paper loss in a derivative market, not an economic catastrophe.
The Pattern Repeats
The tulip mania established a template that markets have followed ever since:
1. Financial Innovation Creates Access New instruments (futures, options, SPACs, NFTs) lower barriers to speculation.
2. Leverage Amplifies Returns Minimal capital controls maximum value, attracting speculators who couldn't otherwise participate.
3. Social Proof Drives Momentum Once "everyone" is making money, staying out seems foolish.
4. Structural Flaws Hide Risk Non-recourse loans, legal ambiguity, and moral hazard create false security.
5. Authorities Face an Impossible Choice Let contracts fail and contain damage, or enforce them and risk systemic collapse.
We saw it with portfolio insurance in 1987. With Long-Term Capital Management in 1998. With subprime mortgages in 2008. With SPACs in 2021.
Each time, we call it unprecedented. Each time, it's the same pattern with new instruments.
The Modern Tulips
Today's tulips aren't traded in taverns—they're traded on apps. But the structure remains remarkably similar:
Fractional real estate platforms letting you buy property with $100
0DTE options providing maximum leverage with minimal capital
Crypto futures with 100x leverage and liquidation cascades
Buy-now-pay-later real estate deals with deferred down payments
The instruments evolve. The psychology doesn't.
We still gather in our modern taverns (Discord servers, Reddit forums, Twitter Spaces) to bid up assets we'll never actually possess. We still use leverage to amplify returns we can't actually afford. We still assume someone else will buy our position before the music stops.
The Lesson Nobody Learns
The real lesson of tulipmania isn't "don't buy overvalued assets." It's that market structure matters more than market prices.
When you combine:
Easy leverage
Limited liability
Social pressure
Regulatory uncertainty
You get bubbles. Every time. The asset doesn't matter—it could be tulips, tech stocks, or pictures of monkeys.
The next bubble won't announce itself as a bubble. It will arrive disguised as innovation, wrapped in complexity, and justified by this time being different.
But look for the tell-tale signs:
Are people trading promises rather than assets?
Can you control large positions with minimal capital?
Are losses socialized while gains remain private?
Is everyone suddenly an expert in something they knew nothing about last year?
If you see this pattern, you're not looking at a new paradigm.
You're looking at tulips.
The Bottom Line
The Dutch didn't go crazy in 1637. They invented modern finance.
The tulip mania wasn't about irrational exuberance over flowers—it was about rational response to a market structure that rewarded speculation and punished prudence. The same structure that creates bubbles today.
Understanding this doesn't mean you'll time the next crash perfectly. But it might mean you'll recognize the game being played before you become the greater fool.
Because whether it's tulip futures in Amsterdam taverns or meme stocks on Reddit, the mechanics remain the same: leverage, liquidity, and the eternal hope that someone else will pay more tomorrow than you paid today.
The flowers change. The game doesn't.
Think Well. Act Wisely. Build something Timeless.
What modern "tulips" do you see in today's market? Are we witnessing innovation or just the same old speculation in digital drag? Reply and let me know what patterns you're seeing.
And if you found this historical perspective valuable, share it with someone who thinks this time is different. They might need the reminder that it never is.
https://www.khanacademy.org/humanities/world-history/world-history-beginnings/ancient-mesopotamia/a/mesopotamia-article
Digital Art. Pictures and characters were being sold online - I can't think of the correct terminology but essentially you owned the digital rights and many hoped others would pay to rent or buy their "picture". Seemed bizarre to me, it's just a picture, it's online subject to disappearing and even copying. Seems to have faded.