Photo by Jeremy Bezanger on Unsplash

For many years, whenever financial analysts and storytellers have warned readers about the dangers of the crypto bubble, many of them have recounted the cautionary tale of one of the biggest speculative bubbles in history—Tulipmania in the Netherlands. 

Perhaps you’ve already heard of it. If you haven’t, it’s a great story. 

Sometime in the early 17th century, at the height of the period called the Dutch Golden Age, something strange happened in the Netherlands. 

Quite suddenly, everyone started going crazy about tulips.

Today, we think of tulips as a flower that’s endemic to the Netherlands. It’s found everywhere and is the national symbol of the country. But back then, it had just been brought in from the Ottoman Empire by some botanists. For a while, it was cultivated in lush, private gardens. Yellow tulips. Red tulips. Then, people slowly started getting more and more interested in the flower. They paid progressively larger sums of money to botanists for tulip bulbs and seeds. Things started going out of control. 

The craze reached a crescendo when it was discovered that there was a rare phenomenon which gave rise to a different kind of tulip, appropriately called cultivars. Instead of the regular tulips in solid colours, some tulips would break out into beautiful striped patterns. These tulips were rare, hard to breed, and didn’t last long… which made them even more valuable. 

All this took tulip prices, and speculation on them, to another level. 

Much later, it was discovered that cultivars were a diseased form of tulips, caused by a virus.

As the story goes, the offer was rejected for being too low. 

Finally, around three years after it began, the bubble burst. Prices reached a point where people simply couldn’t buy tulips anymore, and the selling started. Then it became obvious that the prices were sky high, which brought down prices even more. This went on and on until the bubble burst, and everything collapsed. 

Some would argue that the story of Tulipmania is a warning about the dangers of speculation on something ephemeral, like cryptocurrency. Many crypto supporters would disagree. If they got a chance, they’d tell you how crypto is nothing like Tulipmania, which revolved around a product with a fixed supply curve. Or they’d tell you how Tulipmania never really brought down the economy, and that its collapse went by unnoticed by regular members of society. Or how, unlike tulips, crypto has decentralised checks and balances. Or even how Tulipmania lasted for just three years, and crypto has been around for nearly a decade.

In all honesty, they’d have a point. I don’t think Tulipmania is anything like crypto. It’s like apples and oranges. 

But this does not mean that crypto makes sense, or that it isn't a bubble. All bubbles are different. If they were similar, then we’d spot them a mile away, and would stay away from them in the first place. 

Tellingly, the biggest difference lies in how the respective governments reacted to tulips and cryptocurrency. When the tulip bubble burst in the Netherlands, the government offered to buy contracts at 10% of the value of the sale. 

In the case of India and crypto, the state’s reaction is… confusing.

Let’s begin with the Reserve Bank of India (RBI), which, let’s say, isn’t a big fan of cryptocurrency. The RBI hasn’t made its objections specific, but it has been cautioning banks, investors, and the public about the dangers of virtual currencies like Bitcoin for a while. Back in 2018, it sent a circular to all banks and financial institutions prohibiting them from offering services to individuals or entities operating virtual currencies. Since the RBI regulates most of the formal financial system in India, this amounted to a virtual ban on cryptocurrency in India. 

So the crypto companies went to court. 

They argued that the RBI’s move was unconstitutional. The basis for their claim was that crypto was a commodity like gold, rubber, or steel, and that the RBI had no business regulating a commodity. In turn, the RBI claimed that it never placed a ban on crypto, it merely prevented banks from dealing with it. And since it regulated the banks, it was well within its rights to do so. 

Anyway, the Supreme Court took a look and decided that the RBI had gone too far, and ruled that the circular had to be withdrawn. 

Crypto would live to fight another day in India. 

However, the most important part of this legal battle was the heart of the argument made by the crypto companies, i.e. that crypto was a commodity. 

This is the central conflict around cryptocurrency.

There have been two competing viewpoints about crypto. One is that it's a security. Another is that it’s a commodity. And because crypto can act as both, it makes it difficult to decide which regulations apply to it. 

I’ll explain. 

Let’s start with the argument that crypto is a security. 

If you are wondering what exactly is the definition of a security, we have a ready answer. It’s something called the Howey Test in the United States. It’s generally used by many countries to determine whether something is a security or not. The test is simple. In essence, it says that something is a security if it’s "an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."

Does crypto fall in this definition? 

For a long time, it was believed that the government would launch a bill banning all forms of cryptocurrencies. However, according to one source, there’s a bill expected to be tabled before the budget which will define cryptocurrency as a commodity.