What is the Cantillon effect?

Originally coined by 18th-century economist Richard Cantillon, the Cantillon effect is defined as “a change in asset and consumer prices resulting from a shift in money supply”. Simply introducing a large amount of cheap money available through banks doesn’t guarantee that demand for all products will rise equally; rather, history shows that certain assets outperform others, resulting in price increases in some areas of the economy and price declines in others.

According to the Cantillon effect, the first recipient of a new money supply has a unique arbitrage opportunity to spend this money before prices begin to rise. Typically, this new money is distributed to banks and asset holders first; they can then use this new money to purchase products and assets whose prices haven’t yet risen due to the increase in the money supply.

The Nakamoto effect, on the other hand, allows everyone on the Bitcoin network an equal opportunity to receive the new monetary supply first. Miners contributing their computing power to the network are rewarded with newly minted Bitcoin and fees in direct proportion to the amount of protection they provide the network.

How does Bitcoin fix the Cantillon effect

The solution to many of the problems stemming from a state controlled money supply can be found in cryptocurrencies; an alternative, decentralized currency which the state cannot control. After the Great Financial Crash of 2008, the first and most significant of these cryptocurrencies, Bitcoin, went online for the first time in January 2009.

The Bitcoin system completely eliminates lobbyist influence and the benefit of knowing the right banker; every 10 minutes, every active miner on the Bitcoin network has an equal opportunity to receive a reward of the newly created Bitcoin until the total supply is reached. Further, the barrier to entry of becoming a Bitcoin miner is relatively low; simply plugging in a computer and downloading the blockchain software is all that is required. This puts everyone that engages in the Bitcoin system at an equal footing - nobody is at a greater advantage simply based on their socio-economic status.