- UBS economist Paul Donovan said plans for bitcoin futures contract mirror the situation just before the tulip bubble burst in the 1600s
- CME Group announced plans to introduce bitcoin futures contracts, pending regulatory approval
- The price of bitcoin soared above $7,000 to hit a new record high
CME Group announced plans for bitcoin futures contracts earlier this week, a move that UBS analyst Paul Donovan has compared to the introduction of a similar product just before the tulip bubble burst in the 1600s.
The tulip craze in the Netherlands in the 17th century saw the price of the flower skyrocket. This resulted in a crash of that market in 1637.
In 1636, cash-settled futures were introduced in the tulip market. A futures contract is one where a buyer and seller will agree a price for a commodity that will be delivered on a certain date. This previously meant that the physical product had to be delivered. But cash-settled futures contracts allow cash to be delivered upon expiration.
This method was used during the tulip bubble and a year later in 1637, the market crashed.
The CME Group said earlier this week that it plans to launch bitcoin futures in the fourth quarter, pending regulatory review. Those futures will be based on cash settlement too.
Donovan, wealth management global chief economist at UBS, said: "We've been here before."
In a follow-up email to CNBC, Donovan explained the issues with the cash-settled futures contracts for tulips and how that compares to bitcoin.
"The idea of not physically delivering the product was rather shocking to contemporaries (as it turns out, the market crashed before bulbs could have been delivered anyway – bulbs were lifted in June 1637 for physical delivery). Traders met in groups (in taverns), called 'Colleges.' Think of the taverns as the cryptocurrency exchanges of their day," Donovan said.
UBS has been been one of the bearish voices on bitcoin. In a research paper published last month, the investment bank said that bitcoin is a "speculative bubble" and will never be a real currency.
Bitcoin has often been compared to the tulip craze. Jamie Dimon, CEO of JPMorgan Chase, called the cyrptocurrency a "fraud" and said "it's worse than tulip bulbs" and "won't end well."
The cryptocurrency continues to rally. On Thursday, bitcoin smashed through the $7,300 level to hit a new all-time high.