Greetings from the Bitcoin Mansions

The monetary dreamworld inhabited by advocates of bitcoins and s***coins is a funny place, filled with all sorts of magical creatures. From widespread convictions that bitcoin adoption can elaborately fix this or that societal problem, to mansions, sports cars and the originally ironic idea of bitcoin-fenced citadels, lots of strange ideas take shape in this enchanted realm.  

In an investigative piece titled ‘The Citadel: A Manifestation of Bitcoin Utopianism,’ bitcoin writer Dustin D describes the Citadel conviction as follows:

“a belief in a future where society could possibly be stratified between early and late adopters of Bitcoin as the global reserve currency, giving those who got in early and accumulated large quantities of Bitcoin or later stage adopters with available capital who also were able to transfer wealth from fiat currencies into Bitcoin (albeit at much higher prices). This stratification would lead to resentment against early adopters who would hold vast quantities of wealth in the now highly valued world currency.”

Bitcoiners are rarely good monetary economists, but insist that their take on money is thoughtful, valuable and perhaps even revolutionary. As the cognitive dissonance is particularly striking regarding this “Citadel conviction,” let’s mix this extreme wealth creation with another monetary concept bitcoiners enjoy invoking: Cantillon effects. 

The accusation of unfair monetary practices underlying the Cantillon effect – as argued by bitcoiners, Austrians and goldbugs alike – goes something like this: the current monetary system is unfair because governments and big banks have captured society’s money printing mechanism, which they use to enrich themselves at the expense of the rest of us (note the underdog populism narrative).   

Fundamental to the effect that bears Richard Cantillon’s name is that the way new money enters the economy matters. The first receivers of new money get to buy things at old prices, in the process increasing those prices such that downstream holders of cash (or receivers of fixed income) see their purchasing power erode. We can all empathize with the unsuspecting pensioner or the unbanked households left holding the bag through no fault of their own; they see their money buying them fewer goods and services without quite understanding why and without being culpable. An unfair redistribution.

I’m not entirely unsympathetic to this story but want to point out two major problems. First, every monetary system produces Cantillon effects. Even a monetary system where no new money (a strictly rigid money supply) can enter – say the Swiss dinars employed by Kurds in northern Iraq after U.N. sanctions in the 1990s – provides whoever happened to hold the cash with “unfair benefits.” Gold standards, the monetary regime that Cantillon was specifically analyzing (and, ironically, the primary regimes favored by many of those invoking Cantillon effects as one of society’s major injustices), also redistribute purchasing power – from current gold-holders to mining prospectors in tandem with the latter’s purchases spread through the economy. 

We might quibble over which system is least just, but it’s not obvious that one system is clearly faulty when every other system suffers from the same alleged weakness.  

Second, what about the size, the empirical humph? What kind of numbers are we talking about? If you listened to the most vocal bitcoiners who recently stumbled across the concept of Cantillon effects, you might believe that we’re talking astronomical numbers: after all, bank fat-cats and trillion-dollar Fed purchases sounds like a lot. On the contrary. 

While Jim Caton points out that “The resulting redistribution of wealth is not insignificant,” reported estimates are of fractions of a percent of GDP – something like 0.1%–0.4%. That’s a lot of money in a $22 trillion economy, but altogether swamped by minor changes to, say, the tax code or on par with protectionist tariffs. Nothing to sneeze at, but also not the stuff of revolutions. 

What about those mansions?

The dissonance emerges once we start investigating how early adopters in the crypto space become rich. For how does somebody stacking sats actually become rich? Bitcoin, like gold and other commodities, does not produce anything; it does not yield you a stream of income or pay dividends out of profits that the system generates. 

Bitcoiners get rich from selling coins at higher prices. 

Provided that their “mooning” dreams come to pass (not showing one’s behind, but the exospheric destiny for the price of bitcoin) and bitcoin becomes the next global currency, latecomers will have to buy at increasingly high BTCUSD prices – and ultimately in exchange for goods and services as incumbent fiat currencies become worthless. The similarities to the unjust redistribution of purchasing power in the above Cantillon effects ought to be obvious. 

Early bitcoin adopters, however prescient their beliefs and persistent their rallying cries, acquire their coveted mansions through the exact same redistributive mechanism that they love to castigate; Bitcoiners hate the injustice of Cantillon effects – but their salient dreams of citadels and future wealth rely exclusively on redistributed purchasing power from latecomers. By front-running the next monetary regime, they get in on the action before the masses – and sell coins back to them when the exchange rate between bitcoins and the inputs needed to produce cars and mansions has become sufficiently high. 

JP Koning writes that bitcoin is “a type of zero-sum game that uses entrance order as its redistribution rule.” One wonders how somebody else’s monetary redistribution scheme is unbearably unjust, but my tribe’s monetary redistribution scheme is a liberating retaliation to a corrupt and unsustainable fiat system.  

In finance, we call this kind of behavior Talking One’s Book – “the act of promoting a stock one owns in order to entice others to buy it.” Zero-sum games that redistribute wealth from late-comers to early adopters are usually referred to as Pyramid schemes or Ponzi schemes. It takes some cognitive dissonance and serious monetary magic to make them seem not just like viable but superior money. 

Perhaps global bitcoin adoption will inevitably come to pass, and I will regret my hostile words to this immature technology. But for now, bitcoin’s monetary dreamworld does look rather fanciful and full of strange beliefs: a land of fairies, castles and – I imagine – princesses, a land, writes Jemina Kelly at Financial Times, “where bunk and baloney thrive.” 

Sayonara from the mansions. 

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