Bitcoin’s Cantillon Effect and Hidden Opportunities in Bitcoin-Related Stocks

This week’s topics:

• Bitcoin Cantillon Effect

• Bitcoin Price

• Pre-Recession Update

  • 10Y and Stocks

The Bitcoin Cantillon Effect

The Cantillon Effect is well-known to Bitcoiners. It is the concept that people closest to the money printer disproportionately benefit from inflation. As inflation percolates through the economy, those with the privilege to spend first do so before prices rise. Those down the line have to pay inflated prices. This was also the precursor to the Austrian Business Cycle Theory.

Bitcoin has a reverse Cantillon Effect (In my research for this post, I ran across Junseth using this term, but my meaning is different). As money comes into bitcoin, its market cap rises more than 1:1. Value/purchasing power is created out of thin air. In 2021, Bank of America estimated a 107x multiple during that bull market. The multiple will vary widely depending on supply and demand at different stages in the cycle — perhaps even being negative in bear markets — however, the average multiplier is significantly positive. Every $1 coming into bitcoin results in more than $1 of market cap appreciation. Instead of coming from government printing, the Bitcoin Cantillon Effect is created naturally by purchasing power increases. The results will be something akin to a wealth effect.

The new purchasing power will tend to enter the economy through specific channels: In this case the Bitcoin industry or adjacent industries. Not all the new value will be spent or invested — a large minority will end up being held — but some new purchasing power will be used, disproportionately stimulating the Bitcoin industry relative to the economy as a whole, because the bitcoin industry is the closest to this creation of new purchasing power.

The traditional Cantillon Effect results in rising prices through inflation, because it is a single-currency phenomenon, where the new purchasing power comes from more currency units. The reverse Cantillon Effect of bitcoin is a two-currency phenomenon and may lead to rising prices in dollar terms, and falling in bitcoin terms.

However, being a two-currency phenomenon we must consider Gresham’s Law, which informs us that most of the new purchasing power from bitcoin appreciation will likely be held or invested as people will prefer to spend the less sound money. An additional factor that supports the theory that new purchasing power will be held or invested is the fact that this cycle is shaping up to be dominated by institutional-level investment and holding.

Bitcoin Related Investments

The key takeaway from Bitcoin’s Cantillon Effect is bitcoin appreciation will directly favor bitcoin related goods and services. Trillions of dollars of stimulus will be funneled directly through this industry. As bitcoin approaches a high commensurate with global adoption, whether that is $1 or $10 million, the asymmetric opportunity will switch from holding bitcoin to investing in related goods and services.

At $40,000, a rational argument can be made for a 100x return, but when bitcoin is $1 million, the rational upside drops to 5-10x. At that time, however, many bitcoin-related businesses will have an upside of 100x because they are closest to the source of purchasing power creation. Those investments will include anything from public companies, to hardware wallets makers, to games involving Lightning Network, to liquidity management firms, etc. We are still early in this game, but we can look to public options already available.

For instance, $COIN has had a fantastic run, breaking out of a nearly 2-year long consolidation. This is a sign of a broad market trend ramping up into a bull market. It is also a positive sign for the ultimate approval of the spot Bitcoin ETFs, since Coinbase is the main custodian these products will use. 

Technically, there is some resistance on the chart around $160 and RSI is becoming overheated. Price may still rise another 25%, before it back tests the breakout level.

Bitcoin miners have yet to break out but are likely to follow Coinbase, so there is opportunity there. The Valkyrie Bitcoin Miners ETF (WGMI) is rounding the bottom with RSI and MACD pointing up. Hash rate is at an ATH, institutional investors are buying miners, and public sentiment is rapidly changing.

Bitcoin Price Update

Bitcoin has been in an epic channel I first highlighted weeks ago. Previous important levels have been based on candle closes from the channel. First, it was $35,440 to be held as support, now it is $37,877 as resistance. Once price closes a daily candle above that level, we should shoot to the top of the channel again.

The top of the channel will put price above $39,000 and soundly above all structural or volume resistance. The way will be clear for a “God candle,” as Samson Mow likes to put it.

Tipping the balance toward breaking the $37,877 resistance is CME futures maintaining a hefty premium above spot, and above $38k. This premium started on November 21, and has remained approximately $600 or 1.5% higher since, despite the monthly rollover last Friday.

Pre-Recession Update

I am the dissident bitcoiner, so my macro calls have been out of consensus but highly accurate. Over the last couple of months, I’ve made a big deal about the imminent flipping of markets into a pre-recession period. What I mean is that historically there is a clear period prior to recessions where Treasury yields turn down and — contrary to most other professional analysis —  stocks go up. This is not a move from risk-on to risk-off, or vice versa. It is a huge oil tanker turning from a heading of hope of high growth to one of realized low growth.

Last week, I also wrote about the illusion that liquidity is rising. In fact, it has dropped dramatically. M2 and commercial bank credit are declining. The demand destruction from high prices is starting to become evident. I’ve also highlighted the Fed Funds Futures market pricing in no more hikes and the first cut by the Federal Reserve as early as March.

All these factors theoretically point to a recession starting somewhere around the middle of next year. Do the charts agree?

The US 10Y Treasury yield agrees, falling through major support.

Stocks also agree. The NASDAQ is back at a yearly high and the S&P is close behind. Since March, when everyone else was extremely bearish on stocks, the NASDAQ is up 35% and the S&P is up 18%.

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