Bitcoin’s Cantillon Effect and Hidden Opportunities in Bitcoin-Related Stocks
This week’s topics:
Bitcoin Cantillon Effect
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.