Sometimes bitcoin attracts attention as a bizarre new thing with a rapidly growing price, minting new fortunes. Other times, bitcoin attracts attention as a bizarre new thing with a collapsing price, destroying fortunes. I’m sometimes asked about the price of bitcoin, but unfortunately I don’t have any insights to share – and the reason is best understood in terms of pork bellies. That might seem like a non sequitur, but I want to distinguish between commodity markets and the underlying production systems.

In a commodity market, buyers and sellers meet to exchange the commodity of interest at some variable price. The market for pork bellies is long established, and has played a role in movie comedies like For Pete’s Sake and Trading Places.

Even people who aren’t involved in the business usually have at least some vague intuition about the players on either side of the commodity market. Before reaching the selling side of the market, there are farmers raising pigs, as well as processors who buy the pigs for butchering to produce pork bellies. After the buying side of the market, there are food companies that buy pork bellies, as well as the consumers who buy bacon and related products from those food companies.

If we want to predict price movements in the pork-belly market, it might be helpful to know something about the flow of pork bellies through this system – just so we can avoid making stupid mistakes. But knowing how the production system works – say, how to slaughter hogs or package bacon – doesn’t intrinsically give insight into what the market price will be next week. Likewise for bitcoin.

Realistically, the bitcoin market is just another commodity market like the pork-belly market: there are traders and speculators; rumors and news; booms, busts, trends. Buying and selling bitcoin has basically nothing to do with the underlying technology. Although bitcoin and pork bellies have no similarities in their production systems, they are very much alike as commodity markets – for better and worse.

Now that we know that bitcoin’s technology doesn’t have much to do with its price or getting rich, is there anything that’s worth knowing there? The first thing that’s worth noticing is that bitcoin has worked successfully for a number of years. That’s easy to overlook, because there have been spectacular failures of various systems built around or near bitcoin – like exchanges from which money has been stolen, or “smart contracts” that have gone awry. But the core system has kept working.

That core system is basically just bookkeeping – but it’s cooperative bookkeeping, without a central bookkeeper. The cooperative aspect even works despite some of the “members” of the cooperative trying to cheat. That’s not something that anyone really knew how to do before the bitcoin system started running, and it’s rather impressive that it works.

Even if you don’t care about creating your own money system, bitcoin might be interesting – because this kind of cooperative bookkeeping is general-purpose. When people talk about “blockchain,” here’s what they usually mean: extracting the cooperative bookkeeping concepts from the specific case of bitcoin, and then using them in a completely different domain that has nothing to do with currency.

Bitcoin and blockchain are fascinating systems, and they’re worth understanding – but that understanding won’t help you beat the market! After all, the system that transforms hogs into bacon is pretty powerful and interesting too… but we know that understanding that system won’t necessarily give you any special insight into the next moves of the pork-belly market.

Leave a Comment