Naysayers are warning that the dizzying rise in bitcoin's price has all the makings of a bubble that could burst in a spectacular and painful way. We've seen it before.
Previous bubbles have driven up the value of investments, collectibles and other odd items to ridiculous levels. It seemed like only a matter of time before prices would crash -- and each time it finally happened, it was devastating.
There’s no doubt bitcoin’s price is inflated, but fans of the digital currency say it's different from the other manias that became bubbles. They argue that the blockchain technology underpinning the digital currency will change the way global business works.
Still, that’s only an expectation at this stage.
So, bitcoin buyer beware. Before you fill your digital wallet with bitcoins, learn from these cautionary tales of some of the world's biggest bubbles.
1. The tulip bulb bubble
The first recorded market crash happened in the 1600s when tulips were exported from Turkey to Holland for the first time.
The novelty of the exotic flowers made them pricey from the get-go, but their value exploded when tulips caught a virus that created flames of different colors on their petals. The new color combinations were then priced based on their relative rarity and desirability.
Investors snapped up so many tulip bulbs that they depleted the market, making highly valued bulbs even rarer. Prices multiplied 20 times over in just one month, until people were trading their homes and life savings for a single bulb.
And then, the bulb bubble burst.
As some savvy investors began selling their tulip bulbs, others followed. The flood of bulbs back onto the market lowered their value until they were worth no more than common onions. The entire tulip market crashed, and Holland fell into a deep recession.
Artificial value inflation can lead to a speculative bubble with any asset, whether it’s tulips — or a virtual currency.