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 the subject to criticism. In fact, this ceiling reflects its creators’ doubt of the quantitative easing programs that firstly the central financial institution of the United States, Federal Reserve, started to practice after 2008. However, this restraint also leads the bitcoin system to have potential deflationary outcome.

The times after the world economic crisis were characterized by strong expansion of investment that aggregated the need for 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 expenditure 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, there was created a particular money market where banks loan to each other in order to resolve the problem of lack of short-term liquidity, though they can also call the central bank, which embraces the advantage of money creation and establishing the monetary base in terms of issuing banknotes in order to grant liquidity to commercial banks guaranteeing that way the price stability, as well as 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, since 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 primary focus of global media when the financial crisis in Cyprus occurred and caused one of biggest concerns about the future of the European single currency. The worries about the future of the euro have caused the bitcoin to triple its value in less than a month, reaching the price of 141 dollar for the first time in first days of April 2013. This was one of the most visible examples how a search for an alternative is shifting the demand of the 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 made to the occurrence of bitcoin being backed with fierce confrontation. This type of confrontation was seen because of the unpredictability of the bitcoin’s price can be reviewed as a lack of knowledge on questionable reliability of decentralized governance, since it is difficult to rely only on the efficient credit control without a support of the governmental plan and central banks’ monetary policies. There were numerous studies on the supremacy of common goods, open-source assumption and a certain sort of what some called digital collectivism that, all together, 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 into 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 rate of the credits that banks offer to their clients, creating the liquidity shortage, since many individuals or businesses are not able to have an access to this money. This causes dissatisfaction, since the trend is present everywhere and not a single bank can offer something that differentiates completely from the rest of the financial sector. In that terms having decentralized system is something that causes bitcoin’s key advantage, regardless how exposed to peripheral shocks this cryptocurrency is because of the lack of a centralized regulation system.

Particular occurrences, such as cyber-attacks, errors in cryptogram, regulatory transformations, transaction of volumes and dysfunctions of key may have an impact on the value of the bitcoin, though the margin of arbitrage gives rise to financial assumption which additionally makes the circumstances more complex and therefore bitcoin cannot serve as a mean to determine a 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