Bitcoin : The Tale of Newest Economic Narrative Example

Bitcoin illustration. Photo: WAYA

TechSpace - There is a famous story that has developed among the Dutch people. The story is about Dutch people who have Tulip fever. At that time, the price of tulips inflated and was known as the first price bubble in the world. Tulip mania (Dutch: tulpenmanie) was a period during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels. The significant acceleration began in 1634 and abruptly ended in February 1637.

In many aspects, the tulip mania was less of a severe economic crisis and more of a then-unknown socio-economic phenomenon. It had no significant impact on the wealth of the Dutch Republic, which had the highest per capita income from around 1600 to roughly 1720 and was one of the world's foremost economic and financial powers in the 17th century. Based on the Dutch history of Anne Goldgar in the book Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age (2007), in 1637, the narrative about the tulip flower changed. People lost faith in the future value of investing in tulips. When people stop buying tulips, the production continues so that commodity prices fall freely.

Read also: Bitcoin Basics: Simply Guide for Beginners

While there is some controversy about whether greedy speculators were solely responsible for the volatility in tulip-bulb prices, it is undeniable that booms and busts capture the public's attention. Today, when asset prices diverge from their underlying values, the phrase "tulip mania" is frequently employed as a metaphor to describe any significant economic bubble. Well, the story above is a concrete example of narrative economic theory.

Picture: Thompson

Robert Shiller, a Yale University professor, economist, and author of the book Narrative Economics (2019), contends that the first "bubble of any consequence" appeared around the same time the first newspapers appeared. According to Shiller, the response to bitcoin is an "epidemic of enthusiasm," which foresaw both the housing bubble and the dot-com boom in the U.S. economy. He also described it as a social movement. Therefore, he argues that narrative economic theory must be included as a driver of economic change.

Robert Shiller. Picture: ZVG

Economic narratives encourage changes in financial behavior by Individual and group decisions, such as how and where to invest or how much to spend and save, are guided by narrative. This theory's central tenet is that market trends can be affected by news that circulates via social media, mainstream media, or word-of-mouth. Thanks to the economic narrative, various commodities and assets are booming in this era. One of the phenomenal ones is crypto assets. Recently, the narrative description of crypto assets has become very intense in society, especially among young people.

The narrative is one of the determining factors and fundamentals of forming the price value of crypto assets. The cryptocurrency price with the largest market capitalization, bitcoin, is moving like a "roller coaster," depending on the developing narrative. The Bitcoin narrative contrasts uninspired bureaucrats with stories of motivated young people worldwide. It also tells a tale of wealth, inequality, cutting-edge technology, and mysterious, incomprehensible jargon. Most people are interested in buying bitcoins because they are driven by psychological pressure in the digital era, namely the fear of missing the current trend or what is often known as the acronym FOMO (fear of missing out).

Read also: The Key Why Bitcoin Being So Powerful

Indeed, in addition to the narrative, other fundamentals also shape the price of crypto assets, one of which is the cost of capital to "mine" crypto assets. Unfortunately, it must be admitted that regardless of the price of the multi-algorithm software used to "mine," the cost of crypto assets will still fall if a narrative emerges from an influential narrator that triggers a collective decision to withhold demand for the crypto asset.

So, is Bitcoin a bubble?

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