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The Nakamoto Effect: How Much Bitcoin You Hold Doesn’t Matter

The Nakamoto Effect: Why It Doesn't Matter How Much Bitcoin You Have

Humanity is living in the midst of a major economic paradigm right now.

Ever since humans first developed currency systems for trade and commerce, we’ve increased our efficiency ten-fold as a society. At the same time, however, using these currencies introduced another unintended consequence that we’re only now beginning to address: purchasing power debasement. Fiat currencies lose their value over time as centralized authorities print and release more units into circulation.

Over time, the end result is an ever-increasing gap between the rich and the poor. While the rich have the luxury to invest their money into harder assets which retain value over time, poorer people are forced to spend their money and fall behind the relative rate of inflation, driving them further into poverty.

Unfortunately, that’s been our economic reality for thousands of years. However, real change was finally set in motion about 15 years ago when the Nakamoto effect entered the equation.

Understanding The Cantillon Effect

Before understanding the Nakamoto effect, it’s helpful to first understand the Cantillon effect.

Richard Cantillion, an early 18th-century economist, first pointed out this phenomenon after noticing the uneven changes in relative prices that resulted from a varying money supply.

The Cantillon effect is a phenomenon where those closest to the money printer benefit the most, while those furthest are hurt the most. The money flows to the wealthiest individuals first, who then decide how to distribute it out to the rest of the population.

The Cantillon Effect

The Cantillon effect happens due to the new swaths of money being created out of thin air and immediately handed over to central banks, investment firms, corporations, and the like. These entities spend it on assets that haven’t adjusted their value for the newly increased money supply; Essentially buying them at discounted rates, purely because they’re are positioned so close to the money printer. Only then do prices start to climb from the debasement, and only then does the money flow from these entities to the people.

The result over the past several hundred years has been continuous wealth flow to the rich while the ever-growing population of less fortunate people split the remains. But all that is set to change now that bitcoin is here.

What Is The Nakamoto Effect?

Ever since Satoshi Nakamoto released the Bitcoin The Bitcoin Whitepaper to the world on Halloween of 2008, for the first time in human history, we now have a roadmap to navigate ourselves out of the fiat debasement loop we’ve repeatedly caught ourselves in throughout history.

Fiat debasement relative to gold

The Nakamoto effect goes beyond money: it’s A transformative redesign of our economic – but more importantly, energetic – distribution.

Bitcoin’s big breakthrough was introducing a way to facilitate peer-to-peer transactions globally, without the need for any intermediaries. By taking the intermediaries out of the equation, we’re now able to preserve 100% of the economic energy we create and transfer it anywhere through space and time, rather than having to allocate a percentage of it to enriching those who used to facilitate these exchanges.

The problem of today’s money is that it’s an inflationary system running in direct opposition to the force of technological deflation. As our technology improves our efficiency increases, and therefore costs should decrease as a result. But, our inflating money artificially keeps the prices of these costs high.

Bitcoin, however, since it’s also deflationary in nature, synchronizes our efficiency gains with our purchasing power, ensuring that advances in efficiency through technology lead to cheaper costs for the people too.

It’s the Cantillon effect in reverse. Instead of purchasing power accruing to the top 1%, leaving the rest in a sink or swim situation where we have to take risk with our money to outrun inflation, the Nakamoto effect disperses purchasing power out to the open, freely accessible network of holders around the world.

Why Does The Nakamoto Effect Matter?

By reversing the corrosive damage that stems from the Cantillon effect, the Nakamoto effect sets humanity up to drastically improve the world’s quality of life. With this redesigned monetary system, we can:

  • Channel our energy efficiently: Economic energy, that normally gets stored away in the assets of richer generations looking to live rent-free, can now break free from these unproductive assets and move where it matters more: to the wallets of everyday people around the world. More people can accumulate and preserve economic energy for their families that’d otherwise be squeezed out and siphoned to the top via currency debasement.
  • Support class mobility by enriching poorer nations: Rich countries’ citizens like the USA have the luxury to invest their money in hard assets to preserve their purchasing power. Poorer nations, however, don’t have access to financial services at all. The result? Rich nations becoming richer; poor nations becoming poorer. Those countries that have been stuck with their inflating currencies now have access to a robust economic battery with a wallet device, mobile phone, or computer. Over time, the playing field should level out since poor nations no longer have to swim upstream against the economic current.
  • Eradicate monetary manipulation: By distributing control across the globe, decentralized networks like the Bitcoin network prevent centralized entities from overriding and manipulating the monetary system.
  • Decrease the relevance of your personal wealth: As we’ll discuss below, the amount of bitcoin you hold has zero direct impact on bitcoin’s monetary policy, whereas today’s fiat system enables centralized authorities with hoards of fiat to dictate the monetary policy for everyone else.
  • Decrease the relevance of money in general: If this seems paradoxical, consider that the Nakamoto effect fundamentally changes our relationship with money. With a fiat system, people are forced to center their entire life around wealth accumulation in an effort to merely stay afloat, outrun inflation, and support themselves and their family. With bitcoin, however, starting from ground zero with a money that grows purchasing power over time means that people’s lives become easier over time, economically speaking, allowing them to focus more on a fulfilling life instead of surviving.

Addressing The Bitcoin Whales In The Room

Skeptics often cite the concentration of bitcoin in a few addresses as an argument against its decentralization. While these entities do hold significant amounts of bitcoin, they don’t have unilateral power to dictate the currency’s future, as would be the case without the Nakamoto effect.

Satoshi Nakamoto’s Bitcoin Holdings

The obvious, largest Bitcoin whale there is: Bitcoin’s creator.

Past speculation suggests that Satoshi mined 1.1 million BTC that never moved from its original address, more than 14 years ago. While unconfirmed, research shows that Satoshi possibly acquired the bitcoin from mining 22,000 blocks. The key here is that they mined the bitcoin.

Satoshi didn’t just mint 1,100,000 BTC out of thin air to reward themselves for the accomplishment. They had to mine it, using Proof of Work, following the same rules that everyone else has to. Granted, mining bitcoin was much easier then than it is today. But the rules never changed; Satoshi followed them equally as much as everyone else has to today.

US Government Bitcoin Holdings

The US government has accumulated a huge amount of bitcoin over the years by seizing it from Silk Road, criminal operations, and other methods. They currently hold close to 200,000 BTC.

However, the US doesn’t seem to fully understand what they’ve stocked up over the years, as the government has plans to unload 41,000 BTC onto the market throughout 2023. Though large entities like the US government can place outsized sell pressure on bitcoin, it’s a short-term influence, and that’s as much control over it that the government can have.

Eventually, the government will run out of bitcoin to sell, and bitcoin will simply carry on exactly as designed.

Crypto Exchange’s Bitcoin Holdings

Binance is the world’s largest cryptocurrency exchange by far, dominating the total trade volume of all centralized exchanges (CEX) as Statista data from 2022 suggests:

Binance trading volume vs. other crypto exchanges

It should come as no surprise then that Binance’s exchange wallet is the largest individual Bitcoin address out there, sitting on over 250,000 BTC.

Binance exchange BTC holdings

As you can see, the Bitfinex wallet also takes the number two spot, holding just under 1% of bitcoin’s total supply.

Despite these huge holdings however, Binance, Bitfinex, and the like are in no better position to manipulate bitcoin’s monetary policy. They may have the largest public individual holdings, but they still can’t change the code, print more bitcoin, or (legally) spend this bitcoin to create unfair advantage for themselves.

Crypto exchanges buy and hold bitcoin on behalf of users who don’t take self custody, so the holdings in these addresses represent the collective sum of the exchange users’ holdings. Thus, these addresses pose no threat to bitcoin’s integrity.

But of course, there still lies centralization risk with CEXs.

That bitcoin does not belong to its users; It’s merely a huge pile of IOUs that serve as placeholders unless users decide to take self custody. In the event of bankruptcy, however, as we’ve learned from last year’s FTX collapse, bitcoin on exchanges is not guaranteed for their users.

Always be sure to take your bitcoin off exchanges after purchasing them, or consider non-custodial decentralized exchanges (DEXs) that let users retain their holdings as well as private information.

MicroStrategy Bitcoin Holdings

MicroStrategy, bitcoin bull Michael Saylor’s tech company, led the corporate charge for bitcoin in August 2020 after converting its entire > $400 million cash balance into BTC.

The company has made bitcoin acquisition a primary goal – any spare cash flow that the company generates moves into bitcoin.

Currently, MicroStrategy holds 152,800 BTC. dwarfing the size of any other corporations’ bitcoin holdings.

Individual Bitcoin Whales

Beyond institutions and corporate entities, a handful of individual whales still get talked about today. I’m talking about the Max Keisers, Michael Saylors, and Winklevoss twins of the Bitcoin world.

  • Max Keiser was stacking BTC at $1. Reports estimate that he holds anywhere from 10,000 – 20,000 BTC.
  • Michael Saylor currently holds at least 17,732 BTC in his personal stash.
  • The Winklevoss twins reportedly hold around 70,000 BTC together, but specific amounts are unconfirmed.

These are the solo bitcoiners who’ve been involved with the space for a very long time and have acquired huge amounts of bitcoin relative to the average holder. As is the case with these entities too, though they may hold huge personal Bitcoin stashes, they cannot use their bitcoin to exert changes in the protocol.

“But What About Mining Pool Centralization?”

Many will point to bitcoin’s mining pools as evidence that bitcoin is centralizing and that somehow the Nakamoto effect doesn’t apply here. But these statements couldn’t be further from the truth.

First, let’s take a look at the current US mining pool distribution:

Mining pool distribution

Many cite, for example, Foundry’s > 25% control over the mining pool as evidence that Bitcoin mining is centralizing. However, these arguments totally gloss over the fact that mining pools are made up of individuals, with individual minds, capable of making individual choices with where to direct their hash power.

As evidenced by OKX’s old mining pool attempt: miners evacuated in droves after getting spooked by OKEx sudden halting trading withdrawals. In just one month, 99.5% of OKEx’s hash power fled elsewhere.

The point here: if mining pools screw up in any way, there’s nothing stopping miners from moving their hash power to a better-behaving mining pool. Therefore, mining pools, though representative of centralized companies, are incentivized to behave well in order to keep their hash power.
Here’s another recent example to highlight how social consensus maintains mining decentralization, not arbitrary mining pool rules.

Recently, stablecoin issuer Paxos accidentally fat-fingered a transaction fee and vastly overspent on it – by more than $500,000 in BTC.

F2Pool, who collected the fees from the block, decided to return the funds to Paxos rather than distributing it back to those who spent their own energy to provide the hashrate for F2Pool in the first place.

Ever since, there’s been a loud social uproar regarding the legitimacy of F2Pool, and some miners have decided to unplug and move elsewhere.

Social lashback against F2Pool

All of this just goes to show why mining pool centralization concerns are really nothing to be concerned about at all. Unless there’s a protocol level change within bitcoin that changes incentives – which would require network consensus – Bitcoin mining will continue to decentralize further over time as more people around the world join in on the hashing race.

What Really Matters

How much bitcoin you hold doesn’t really matter.

What really matters on a Bitcoin standard is simple: value.

The only way to gain real influence with the Bitcoin monetary system in place is through positive economic exchanges with other users. No amount of bitcoin hoarding, proximity to miners, or other various attempts at gaming the system works sustainably on a Bitcoin standard. Decentralized consensus enforces the rules of the game, and attempts to play by different rules simply won’t convert anyone playing the original game.

Imagine you went to a chess tournament and tried proposing a change to the rules that bend in your own favor instead of relying on the pre-established level playing field.

You likely won’t attract many opponents.

Similarly, rather than relying on a steady debasement of currency over time to artificially inflate your wealth, the path of least resistance on a Bitcoin standard is simply providing real value for others in order to acquire wealth.

There are no shortcuts, no money printers, and no tinkering with the rules. Bitcoin is fixed, reliable, and most importantly: fair. Over time, bitcoin acts as a natural filter for quality, innovation, and genuine contribution to the network and society at large.

Final Thoughts

The Nakamoto effect is what sets bitcoin apart from all other monetary systems in the world. Thanks to its fixed supply and fixed set of rules, bitcoin effectively redirects economic activity to benefit the network first before anyone else.

Unlike the current financial system, which enables rent-seeking behavior to grow wealth off the backs of the less fortunate’s efforts, Bitcoin reverses the Cantillon effect to ensure that those most important to the economy – the people – reap the immediate benefits via lower prices and increased purchasing power.

Which monetary system wins out over time? The people will decide.

FAQs About The Nakamoto Effect

Q: What’s an example of the Cantillon effect in action?
A: A simple way to think about the Cantillon effect and how it hurts people is in quantitative easing. As the Federal Reserve prints more money, it first goes to the big fish – the banks, investment firms, and corporations – before trickling down to the smaller fish. This creates an unfair advantage where these large financial entities can act financially in their own interests before the greater market decides to reprice those entities’ actions.

Q: What’s an example of the Nakamoto effect in action?
A: Imagine that you want to buy a specialty good in another country. Prior to bitcoin, a fiat monetary system employed money transmitters strategically between you and the international good in order to facilitate the exchange across borders. This is time consuming and costly for you, as you have to shell out money for extra transfer fees on top of the good’s already-inflated price. Instead, bitcoin’s Nakamoto effect makes it cheaper over time to acquire that same international good, because there’s no money printer or intermediary to maintain higher prices. They both get stripped away, leaving behind a direct channel to purchase the good, regardless of location, and a purely deflationary force on the good’s cost from technological innovation.

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