Cantillon Bubbles

This is a very misunderstood problem -- specifically, Bitcoin's price inflation problem. In practice, Bitcoin is deflationary money, such that under a Bitcoin standard prices should decrease over time, leading to more purchasing power for savers.

However, this assumes the supply of circulating coins remains constant in every market, but in practice there is likely to be supply shocks and what can be called Cantillon bubbles.

What is a Cantillon Bubble?

The Cantillon Effect typically refers to fiat money and seigniorage granted to insiders. The Cantillon effect can not exist under a Bitcoin standard. However, while this is true in absolute terms over the entire Bitcoin network, local markets can and will suffer supply shocks, price inflation, and cornered markets.

the markets can remain irrational longer than you can remain solvent.

The deleterious effects of Keynesian economics are not only possible under a Bitcoin standard but also very likely. And while such effects cannot sustain indefinitely, the threat and the risk is still there. Even worse, every attempt at such market manipulations will likely correspond with attempts at fractional reserve and seigniorage.

Ultimately, this is an ethical problem. Bitcoin provides an asymetric advantage to savers, but there will always remain a threat from self-interested parasites looking to gain the value of others' honest labor. This is the definition of criminality, and is a problem that Bitcoin does not fully "fix", but rather can only make such criminality more costly (but certainly not impossible).

How does it work?

Imagine an efficient local economy with a small circulating supply -- let's say 1 Bitcoin on average with 10-20 Bitcoin in people's savings. Prices are in sats and traded over lightning with very few on-chain transactions (just periodic settlements). Wages are paid, food and fuel is purchased with regular predictability. People are happy.

Then, one day, an outsider brings in 50,000 Bitcoin into this market. They could buy every business and control the entire supply chain. The influx of new Bitcoin would inflate prices in this local market, leading to a mini-bubble, all based on the whims of this very wealthy outsider.

An efficient market hypothesis will predict that prices will stabilize over time as the new Bitcoin finds its way into the strongest hands. However, unlike gold, Bitcoin can be transferred anywhere on earth with relative ease. The inflated local economy may even attract foreign investors -- further exacerbating the price inflation.

Every local market would be vulnerable to these Cantillon bubbles, and worse, those most susceptible to "paper Bitcoin" (fractional reserve schemes) would likely be targetted by grifters looking to extract wealth. An unscrupulous financier would push for fractional reserve schemes in any these local economies. Many honest people will likely fall victim to various "paper Bitcoin" scams.

In practice, as long as there's someone willing to take the bait, this problem will persist. Localized supply shocks and price inflation will happen with exactly the same problems we see with fiat. The notable difference is that the scammers under a Bitcoin standard will need to be more competent to pull off their grift than modern central bankers (at the very least, they will know they're criminals).

What can be done?

Technically, nothing about Bitcoin will prevent this -- and because of the decentralized nature it will be impossible to adequately regulate. What can be done, and this may likely prove itself out over time, is a wiser civilization where all individuals know that they must save in Bitcoin (proper self custody). There are no guarantees, and it may take several generations for civilization to advance itself and to put "fractional reserve" in the same category as "snake oil".

Ultimately, Bitcoin presents all of humanity -- our entire global civilization -- with a game that's ours to lose.