Bitcoin vs. Fiat vs. Stablecoins: The Modern Cantillon Effect
Inflation is often described by economists as a hidden tax, eroding the purchasing power of your savings over time. However, the reality of monetary expansion is far more complex than a simple general rise in prices. It is fundamentally about who gets their hands on the new money first. When money is created, it does not enter the economy evenly; it has a specific injection point, creating a system of winners and losers based on their proximity to the money printer.
This economic phenomenon is known as the Cantillon effect. It explains why asset prices often skyrocket while wages stagnate, and why the gap between the wealthy and the working class tends to widen during periods of high monetary stimulus. To understand the modern financial landscape, one must look at how different forms of currency—traditional fiat, Bitcoin and other decentralised cryptocurrencies, and stablecoins—distribute value.
In today's article, we will explore the mechanics of money creation, compare centralised and decentralised models, and look at how digital assets are changing the narrative. Let's get started!
What Is the Cantillon Effect?
The concept of the Cantillon effect is named after Richard Cantillon, an 18th-century Irish-French banker and economist who first observed that money is not neutral. In his 1755 essay, he theorised that the impact of new money depends entirely on where it enters the economy and who receives it first.
When a central bank creates new currency, it does not magically appear in everyone's bank account simultaneously. Instead, it is injected into the system through specific channels, typically large financial institutions and the government.
These first receivers are in a privileged position: they can spend or invest this new capital while prices in the broader economy are still low. As they purchase assets, goods, and services, demand rises, driving prices up. By the time this new money trickles down to the last receivers—usually wage earners and pensioners—prices for housing, groceries, and stocks have already inflated.
Consequently, the purchasing power of the average citizen is diluted, effectively transferring wealth from the last receivers to the first receivers. This uneven distribution is the core of the Cantillon effect.
Fiat Printing, Bitcoin Mining, and the Role of Stablecoins
To understand how the modern economy handles wealth distribution, we must look at the three different forms of money: fiat currency, Bitcoin (and other decentralised cryptocurrencies), and stablecoins.
In the fiat system, there is no limit to how much money can be created. Central banks can expand the money supply at will through policies like Quantitative Easing (QE). This system inherently benefits those closest to the spigot—the banking sector, large corporations, and the government. These entities get access to cheap credit and fresh liquidity first, allowing them to acquire assets before inflation sets in. For the average saver holding fiat currency, this constant expansion functions as a mechanism that slowly dilutes their wealth.
Bitcoin offers a fundamentally different model. It was designed with a hard cap of 21 million coins, meaning no central authority can arbitrarily increase the supply to bail out institutions or fund government spending. New BTC can be issued strictly according to the code through Bitcoin mining.
Furthermore, the Bitcoin halving mechanism reduces the inflation rate by 50% roughly every four years, making the asset disinflationary over time. Unlike the closed loop of central banking, BTC mining is permissionless; anyone with the necessary hardware and energy can participate in securing the network and earning rewards, ensuring issuance is based on work rather than political proximity.
Stablecoins, whose market cap sits at $313.78 billion as of December 16, 2025, occupy a unique middle ground in this dynamic. Because they are tokenised versions of fiat currency (usually pegged to the US dollar), they theoretically inherit the inflation and monetary policy of the underlying asset.
If the US dollar loses value, so does a US dollar-pegged stablecoin like Tether USD (USDT) or USD Coin (USDC). However, stablecoins play a crucial role in combating the Cantillon effect on a global scale by democratising access. They allow individuals in developing nations, who might otherwise suffer from the rapid devaluation of weak local currencies, to access the relative stability of the US dollar.
Centralised vs. Decentralised Wealth Distribution Models
The difference between fiat and crypto ultimately comes down to the philosophy of how wealth should flow. The centralised fiat model is built on hierarchy and proximity. It relies on a trickle-down theory where wealth injected at the top is supposed to eventually benefit the bottom.
However, as history shows, this wealth often gets stuck in asset markets, inflating the net worth of investors while increasing the cost of living for everyone else. The system requires implicit trust in policymakers to manage the supply responsibly.
In contrast, the decentralised model championed by Bitcoin is based on rules and merit. This is sometimes referred to as the Nakamoto Effect. In this system, value and new issuance accrue to those who actively participate in the network—miners who secure the ledger and nodes that validate transactions—rather than those with political connections.
It levels the playing field because the rules of issuance are mathematical and immutable. No amount of lobbying can change Bitcoin's inflation rate, ensuring that the monetary policy remains neutral and predictable for all participants.
Cantillon Effect: Examples and Real-World Implications
The theoretical concept of uneven money distribution becomes starkly clear when looking at recent history. A classic Cantillon effect example can be seen in the aftermath of the 2008 financial crisis and the COVID-19 pandemic stimulus measures. In both instances, trillions of dollars were injected into the financial system.
While this capital was intended to stimulate the broader economy, a significant portion flowed immediately into financial markets and real estate. The result was a massive boom in stock prices and housing values, benefiting asset owners and large institutions.
Meanwhile, wages for the average worker remained relatively stagnant compared to the cost of living. The real-world implication is a widening wealth gap where essential assets, like a family home, become increasingly unaffordable for younger generations. This dynamic forces ordinary people to become investors, taking on risk just to preserve their wealth, rather than being able to simply save their earnings.
Towards a Fairer Financial Future
The mechanics of money creation have a profound impact on society. Traditional fiat systems tend to favour insiders and asset owners, perpetuating a cycle where wealth concentrates at the top. Bitcoin offers a transparent, rules-based alternative that removes human error and political bias from the equation, while stablecoins provide a vital bridge for global access to stronger currencies.
Understanding these dynamics is the first step toward achieving financial sovereignty. By diversifying into assets that are resistant to arbitrary debasement, investors can better protect their purchasing power. You can access Bitcoin, stablecoins, and over 100 other assets on VALR.
Ready to diversify your portfolio? Register an account on VALR to get started!
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate. VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
Frequently Asked Questions (FAQ)
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A "Cantillionaire" is a term used to describe individuals or entities who become wealthy not necessarily by creating value or products, but by being close to the source of new money creation, allowing them to buy assets before inflation rises.
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Historically, when the Spanish Empire imported massive amounts of gold from the Americas, the King and merchants received it first, driving up prices. This impoverished the peasantry, who faced higher costs for goods long before the new gold eventually circulated down to them.
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Bitcoin is designed to minimise this effect. While early adopters benefited from lower prices, the issuance schedule is transparent and fixed by code, meaning no central authority can arbitrarily print more Bitcoin to benefit themselves or specific groups at the expense of others.