One of the main reasons why Bitcoin was created is the dissatisfaction and distrust in the existing financial system where monetary creation is principally offered by commercial banks in their lending business. Accepting their disposal means of payment against the institution that declares these agents, credit bodies, generate new liquidity in accordance with the requirements of the financial system and market as a whole. One of the most important purposes of each central bank is to control the inflation rate, while make the circulation of money easier and helping investments to expand.

Quite the opposite, deflation is seen as a risk by economists because money creation accompanies growth. The total fixed volume of 21 million was the main reason why Bitcoin was subjected to criticism. In fact, this ceiling reflects its creators’ doubt of the quantitative easing programs that the central financial institution of the United States, the Federal Reserve, started to practice after 2008. However, this restraint also leads the Bitcoin system to have a potential deflationary outcome.

The times after the world economic crisis were characterized by a strong expansion of investment that aggregated the need for a higher level of security of transactions between agents. On the other hand, the crisis generally led to a retrenchment of credit activities because consumers cut their expenditures and real estate buying, while the business sector postponed their investments by choosing to set out of their supplies. Since banking is not automatically balanced on a day-to-day basis, a particular money market was created where banks lend to each other to resolve the problem of a lack of short-term liquidity. They can also call the central bank, which embraces the advantage of money creation and establishes the monetary base by issuing banknotes to grant liquidity to commercial banks, guaranteeing price stability and promoting the security and effectiveness of the payment system.

The possibility for these banks to be refinanced via the mechanisms that institutions of the countries where they operate have established opportunities to manipulate the activities in order to create the need for monetary creation, as commercial banks pay a price for liquidity supply. Central banks could thus buy or extract a repurchase of particular financial securities held by commercial banks against the provision of liquidity.

Bitcoin came into the primary focus of global media when the financial crisis in Cyprus occurred and caused one of the biggest concerns about the future of the European single currency. Worries about the future of the euro caused Bitcoin to triple its value in less than a month, reaching the price of $141 for the first time in the first days of April 2013. This was one of the most visible examples of how a search for an alternative is shifting the demand of investors who are willing to take new market challenges, looking for more security at the same time.

The fact that the financial world has been witnessing a great turnaround, which was at that time largely represented the exception, not the rule, has led to the occurrence of Bitcoin being backed with fierce confrontation. This type of confrontation was seen because the unpredictability of Bitcoin’s price can be reviewed as a lack of knowledge about the questionable reliability of decentralized governance. It is difficult to rely solely on efficient credit control without the support of the governmental plan and central banks’ monetary policies. Numerous studies on the supremacy of common goods, open-source assumptions, and a certain sort of what some called digital collectivism have shown that the fact that this group of enthusiasts has no centralized organizational control does not necessarily mean that the whole system is expected to be reduced to disorder.

The refinancing rates that act as the prices at which central banks allow the credit money usage represent the main structure of the money market, and when those rates are high, the demand for liquidity by the banks is low. This reflects on the interest rates of the credits that banks offer to their clients, creating a liquidity shortage since many individuals or businesses are not able to have access to this money. This causes dissatisfaction, as the trend is present everywhere, and not a single bank can offer something that differentiates completely from the rest of the financial sector. In those terms, having a decentralized system is something that causes Bitcoin’s key advantage, regardless of how exposed this cryptocurrency is to peripheral shocks because of the lack of a centralized regulation system.

Particular occurrences, such as cyber-attacks, errors in cryptograms, regulatory transformations, transaction volumes, and dysfunctions of keys, may have an impact on the value of Bitcoin. Though the margin of arbitrage gives rise to financial assumptions, which additionally makes the circumstances more complex, and therefore Bitcoin cannot serve as a means to determine value, which, on the other hand, is a crucial characteristic of traditional money.

This article is part of the academic publication Dividing by Zero by Ana Nives Radovic, Global Knowledge 2018