This article was commissioned by China Business Journal; see http://www.cb.com.cn/index/show/zl/cv/cv13456431853
NFT is the full name of Non-Fungible Token. A literal translation would be “non-fungible token.” The so-called token, also translated as “coin” or “token,” refers to some kind of rights certificate: coupons, prize-redemption slips, game coins, and so on all count as tokens. Of course, in the blockchain context it generally refers to a unit of account in a digital ledger. The various digital currencies that were wildly hyped a few years ago were basically “fungible tokens.” Recently, however, NFT has exploded overnight and rapidly gone mainstream. Speculators these days do not care at all whether the object of speculation is legal tender or whether it can circulate like money; instead, they have turned to speculating on “artworks.” Five words can sell for several million yuan; a crude jpg pixel image can sell for tens of millions of yuan. Outsiders can only exclaim again and again: “I don’t get it, but I am deeply shocked.”
Whenever people discuss something that is frantically chased in the trading market, the words “tulip” and “Ponzi” keep cropping up. The “tulip mania” that occurred in seventeenth-century Holland is regarded as the first financial bubble in human history, so much so that it is constantly invoked as a negative example to attack other speculators.
When I think about the significance of NFT, I also think of the tulip episode, but my focus is not on condemning speculative frenzy; rather, it is on tracing the origins of NFT.
Unlike what many people who like to speak of the tulip bubble imagine, the historical tulip episode was not entirely irrational. It certainly had frenzied manifestations, but in the context of its time it was understandable, and its consequences were not destructive either.
First of all, the tulips that were being eagerly pursued were indeed traded in the form of “futures.” They were sold and resold long before the bulbs had even begun to grow. The world’s first stock exchange was established in the Netherlands at the beginning of the seventeenth century, and by around 1937 of the tulip episode, futures trading supported by guarantors and exchanges was already well known to Dutch merchants. This was also the main background to the tulip episode.
However, futures at that time were not “fungible.” Standardized commodity futures would not be introduced by the Chicago Exchange until 1865. The tulip futures of that time were a kind of “NFT,” non-fungible contracts. It was not as if any tulip at all was speculated up to astronomical prices; what was truly driven up were certain specific rare varieties.
Tulips are usually all one color, but around 1637 Dutch horticulturists accidentally discovered a way to cultivate variegated tulips. These tulips had multiple colors on the petals, usually in stripes, and were both beautiful and rare. We now know that this phenomenon was caused by infection of the tulip by some kind of virus. This infected trait could not be inherited, so it could only be cultivated through careful grafting. At the time, people lacked knowledge of genetics and had no concept of viruses, so they had no idea how this coloration formed, which only made these new varieties seem even more mysterious.
Seventeenth-century Holland was the center of printing and publishing in Europe, as well as a major maritime power. Navigation brought in all kinds of rare and exotic treasures, and printing accelerated the spread of information within the country, so a trend of comparison and one-upmanship emerged among the upper classes. Literati took pride in their acquaintance with and knowledge of novel things, while wealthy people took pride in possessing and displaying them. Tulips from the Eastern empire were already deeply loved by the Dutch, and the novel varieties of tulips further stimulated people’s curiosity and desire to possess them.
The so-called tulip mania arose precisely against this background: certain varieties were driven up to exorbitant prices and then rapidly depreciated. It should also be noted that this was the nascent stage of futures trading, far from the environment of universal stock speculation that came later. In fact, the real participants in bidding were, from start to finish, no more than a few hundred wealthy people. The money they spent on tulips was indeed exorbitant by floral standards, but for tycoons who controlled fleets of ocean-going trading ships, it was really not much. No one went bankrupt because of tulips, and no company collapsed because tulips lost value.
In addition, the people who paid astronomical prices for tulips were not necessarily the ones who suffered losses, because aesthetic demand and conspicuous consumption are inherently limitless. Even today we can often see people paying several thousand yuan extra just to get the newest iPhone a day or two early. They know perfectly well that the price will fall a few days later and that supply is unlimited; why, then, are they still willing to pay such a high premium? All the more so in the seventeenth century, when the principle was unclear and the Dutch did not know whether these rare tulips could be supplied in unlimited quantities in the future. Their rush to buy was even more understandable.
Tulip mania neither ended the Dutch love of tulips nor destroyed the Netherlands’ international standing as a major trading nation and financial center. The entire seventeenth century was the Dutch Golden Age, and its advanced market system and financial concepts were learned from and imitated by other European powers. For example, by 1659 the English had copied the Dutch exchange and established their own stock exchange in London.
Looking back at NFT today, it is obvious that a pixel image selling for tens of millions cannot possibly be a price that will last for long. The market’s “frenzy” is beyond question. But to simply remark, “another tulip bubble,” and then turn away, would also be hasty. In fact, if this really is another tulip episode, then all the more reason not to dismiss it lightly. If we look only at the price curve in the tulip episode, then we completely overlook its historical background and the new culture, new ideas, and new forces reflected within it.
First, many of the tulip traders were new capitalists who rose with the help of ocean-going trade, rather than members of the traditional landlord class. They had their own fashions and aesthetics, and were enthusiastic about displaying them. Second, the ultimate consumers of tulips satisfied aesthetic and conspicuous-consumption needs; their gains and losses cannot be measured solely by price changes. Third, the circle of tulip trading was limited and did not affect the stability and development of the broader economic system. Finally, tulip trading relied on the emerging model of credit guarantees and futures trading, and the value of this new trading model would not be depreciated simply because tulips fell in price.
The above judgments can also be applied to NFT trading today: first, most NFT traders are new elites who have risen with the help of blockchain, or at least belong to trendy internet culture; second, a large part of NFT consumption also has a conspicuous-consumption component, and the act of spending lavishly itself is a form of self-display; third, NFT trading is, at least for now, still limited to niche circles; finally, NFT applies emerging models of credit guarantees and free trading under blockchain technology, and these trading models themselves are undoubtedly worthy of attention.
Perhaps in a few years’ time, the recent NFT craze will also become, like tulip mania, a negative example in the history of investing. But the new systems and new technologies contained beneath this craze may also be widely imitated and become part of everyday life.
Translated from the Chinese original with AI assistance. The original text is authoritative.
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