The Value Of Bitcoin Appears To Correlate To The Value Of Avocados And Economists Are Left To Figure Out Why
What if we told you that there’s a correlation between the value of the humble avocado and the ever-mysterious bitcoin? But wait, it’s not what you’re thinking – bitcoin hasn’t suddenly become as affordable as an avocado, nor are avocados now overwhelmingly expensive. Rather, there’s a relationship between the indexes used to track the value of bitcoin and our beloved avocados. And, if we’ve lost you there when we started using words like “indexes,” you’ve come to the right place: we’ll explain.
Let’s start with the correlation between avocados and bitcoin.
Basically, the tea is that one astute observer on Twitter realized that if you look at a graph showing the values of bitcoin and avocado for 2019 beside each other, you’d see that both seem to rise and fall around the same times. The implications of this freaked people out, because if you’ve got the ability to map avocado prices, then maybe, just maybe, you could predict bitcoin prices, too. And remember when bitcoin was worth a lot of money? It meant that people could potentially get richfrom predicting the value of bitcoin. And who doesn’t want to get rich?
You’ve probably guessed that this is where economics comes into it: don’t worry, we’ll break it down for you.
Firstly, it’s important to know what we’re talking about when we say “index price.” It’s basically like the average price of a product, globally. It’s this that shows, in mathematical terms, the ebb and flow of “supply” and “demand” – two processes that form the foundations of economic thinking. The idea is that the value of something is determined by how much of it there is, and also how much people want to buy it.
But it’s all about supply and demand…
Probably the best way to think about supply and demand is in terms of when fruits, like avocados, are in season. Because when avocados are in season, and lots are growing, it means that supermarkets will have plenty to sell to their customers – they have a large supply. They’ll want to sell it quickly so that they can a) make a profit, and b) do so before the avocados go bad. So, they make them cheap, or less valuable, to encourage people to buy more avocados.
At the same time, though, this process also depends on how much people want to buy avocados.
If there’s a sudden craze for avocado on toast, and all of the avocados are bought from the supermarket before they can satisfy every customer’s craving, this means that demand has outstripped the supply. This can drive the price up, as the supermarket knows that people really want the avocados, and so they’ll get away with charging higher prices for them.
Supply and demand isn’t always so straight forward – which is why people are looking for a correlation between Bitcoin and another tangible commodity to begin with.
All of this is pretty much the basis for economic thinking. Of course, it’s a bit more complicated – a whole bunch of different things can affect supply and demand, such as local politics, the environment, international diplomacy and agreements, the media, and even speculation from experts.
But what about Bitcoin?
The same process of supply and demand also works with bitcoin. Even though it’s an online currency, it’s protected by software called “blockchain.” The purpose of blockchain is to basically ensure that you’re buying and selling with safe, legitimate bitcoin – remember, at the end of the day, bitcoin is made from software, so it is theoretically vulnerable to issues like viruses and counterfeiting. Blockchain technology secures it so well that so far, no-one’s been able to infect it, or produce counterfeits.
Bitcoin’s always had an aura of mystery around it – and not just because it’s difficult to “mine” bitcoin, or predict its value.
The weird thing about bitcoin is that no-one knows who actually invented the whole thing. It just kinda popped up one day, ready for people to use with transactions. There’s a lot of theories out there about who created bitcoin, and why they released it the way they did. The technology for bitcoin is so clever and complex, whoever created it is basically the next Steve Jobs. It’s possible that they just didn’t want the chaos of everyone knowing that they invented bitcoin – and created a pseudonym to protect themselves. The other thing is that, by not telling anyone the inner workings of bitcoin, it means that bitcoin is more secure and legitimate: no-one knows how to make it from scratch, or corrupt it.
So now that you know all of this, you probably want to know how exactly avocados and bitcoin are connected. Well, while we’ve gone on this whole rollercoaster of an explainer, the moral of the story is that while there is a correlation between avocado and bitcoin prices, they don’t cause each other to change in value. The price of avocados and bitcoin just coincidentally rose and fell at the same time. Correlation does not equal causation. But you didn’t learn all of that for nothing: you now know enough about it to understand this terrible joke …