In the days of the gold rush, those closest to the king had an upper hand in obtaining gold for their use before the general public. This way, they enjoyed an increased income in a relatively calm market, which meant that they could splurge on the cheap.
Expensive clothes, food, land, extra servants, and the like. The market naturally senses this influx of gold, and prices begin to climb. The point here is that by the time the gold moves from the merchants and farm-owners to the workers and peasants, prices are almost always higher than they were.
Not only do the peasants receive the gold last, but they also now have to use it against the backdrop of increased commodity prices. This pattern is oversimplified, yet repeats even in today’s monetary system. It is called The Cantillon Effect.
Present-day governments have taken the place of ancient emperors and kings who controlled the mines. Central banks can now print money as they please, without limit. This is in stark contrast to back in the day when every dollar printed had to be backed by a corresponding amount of existing gold.
To finance its own spending, the government can now print as much money as it wishes, which tends to have an effect on everyone’s savings. The money we’re already holding gets debased, especially if you own no financial assets.
The government's haphazard money printing is made worse by The Cantillon Effect, as only those closest to the money-printed get to benefit from it. As the newly printed cash becomes injected into the economy, those who get it first get to benefit from an increasing income and commodity prices that are yet to climb.
For the same goods and services, they enjoy a higher purchasing power than everyone, owing to their proximity to power and connections. The Cantillon Effect is amongst the key drivers of societal wealth inequality, despite my illustration being amongst the simplest you’d come across.
To put it simply, the Cantillon Effect works against you because of inflation. The prices of things go up as the markets sense the cash inflows from newly printed money. Bitcoin and cryptocurrencies, in general, can be a nice way to guard against inflation, as only fixed numbers of digital coins can ever be mined.
Besides, no government-sanctioned bodies retain the sole privilege of mining BTC. Whereas the government retains sole powers to supply legal tender into the economy, anyone with a powerful enough computer and a source of electricity can mine cryptocurrencies.
There are no significant costs to printing endless cash; only benefits. This is why governments have resorted to doing it haphazardly. The problem is this exercise ends up devaluing and debasing any savings and cash holding that the populace holds, especially those without financial assets.
On the other hand, the costs of mining BTC are quite tangible. Significant amounts of electricity and computing power are required to successfully mine BTC, an exercise which also progressively gets more difficult as more BTC are mined.
This design places a cap on the amount of BTC that can be mined, hedging the digital store of value against inflation in the process. BTC beats the Cantillon Effect as no new Bitcoins can be arbitrarily mined into the network. Every miner has to provably complete cryptographic equations which validate transactions for BTC to be introduced into the system, a process that utilizes mining power.
By introducing tangible, climbing costs into the process of bringing new BTC currency into circulation, the BTC blockchain severely limits the Cantillon Effect. It is part of the reason why BTC has been touted as one of the largest transfers of wealth in history.
By betting on crypto, you are putting The Cantillon Effect to work in 2 ways;
1. You’re beating the inflation and debasement that comes with governments haphazardly injecting new cash into the economy.
2. You are letting The Cantillon Effect work for you by being early to the ‘gold’. By plugging into the cryptocurrency environment and investing in the space, you are positioning yourself to be close to the king, early.
Considering the Cantillon Effect best benefits those who get the gold and printed cash early, there’s a solid chance that you enjoy the benefits of getting this digital gold early. You can capitalize on the utility of crypto before the rest of the populace catches on and pushes the prices up.
Cantillon says that
‘The first ones to receive the newly created money see their incomes rise whereas the last ones to receive the newly created money see their purchasing power decline as consumer price inflation comes about.’
BTC is the new money; let the Cantillon Effect work in your favor by accumulating as much of it as you can, early. The winners of the Cantillon effect are those who can participate in the rising prices of the new money as it cascades down the economy; BTC.
Aside from limiting the effects of the Cantillon Effect in the current system, you can also apply the same logic to get into some of these cryptocurrency projects early, to reap the highest utility from the currencies that actually work, before the general public gets in and causes prices to rise.
Note: I first heard about the Cantillon Effect from Sahil Bloom.