What is Tulip Mania?

Context

  • The Reserve Bank of India (RBI) governor called the proposed 30% tax on gains from cryptocurrency exchanges a “threat to macroeconomic and financial stability” a week after the budget suggested it.

About Key Details

  • The RBI Governor advised investors when announcing the bi-monthly monetary policy decision, citing the 17th century ‘tulip mania‘ as the first financial bubble. Tulip Mania
  • “Investors should keep in mind, that cryptocurrencies have no backing, not even a tulip”, said by RBI Governor.
  • The central bank has always been opposed to private digital currencies.
  • It had prohibited banks from assisting such transactions, however the Supreme Court revoked the ban in 2020.

Back to basics

About Tulip Mania

  • The 17th-century ‘tulip mania’ is sometimes mentioned as a classic example of a financial bubble, in which the price of something rises not because of its intrinsic value but because of speculators looking to profit by selling a bulb of the exotic flower.
  • It happened in Holland during the early to mid-1600s and is also known as the Dutch tulip market bubble. It was one of the most well-known stock market bubbles and crashes in history.
  • Tulip bulbs rose in value as a result of speculation, and they were traded for a very high premium price.
  • In today’s environment, it serves as a cautionary tale about the dangers of excessive speculation.
  • The term “tulip mania” is used to characterize an economic bubble.
  • People begin to invest in big amounts in a particular asset due to favorable perceptions of it.This causes the price of that asset to skyrocket.
  • After hitting a peak, values plummet due to a large-scale sell-off, leaving asset owners bankrupt. Tulips are a metaphor for these assets.

Ref: ReportIndia

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