“Ovidius” University Annals, Economic Sciences Series
Volume XIX, Issue 2 /2019
Investing Trust in Blockchain Technology: Bitcoin Case Study
Georgiana-Loredana Schipor (Frecea)
“Ovidius” University of Constanta, Faculty of Economic Sciences, Romania
[email protected] Abstract
The present paper explores the current development of cryptocurrencies, emphasizing the
concept of trust related to the blockchain technology and the digital currency market. The study
offers a fundamental review of relevant research papers on Bitcoin, examining the main issues of
trust among five categories of stakeholders: Governments, users, miners, exchanges and
merchants. The results highlight the trust challenges on Bitcoin, reveling a unique perspective of
risks on the cryptocurrency market, contagion effects, decentralisation systems or cryptocurrency
regulation. The blockchain features are explained in order to better understand the Bitcoin
mechanism, presenting the advantages of using such technology, concluding that Bitcoin is a
product of the mistrust in financial institutions and an attempt to use alternative payment systems
in a more secure way.
Key words: blockchain, cryptocurrency, Bitcoin, trust
J.E.L. classification: G11, G15, E42
1. Introduction
Bitcoin, the first cryptocurrency developed in 2009 after the scheme introduced by Satoshi
Nakamoto (2008), is a product of time, where financial institutions were perceived as unable to
manage economic imbalances. Thus, the cryptocurrency market is a response to the financial
uncertainty and crisis effects, a proper alternative to the central banks’ functions in a time of
mistrust of handling the recession period. Bitcoin is designed to be trustworthy, replacing those
parties that one may mistrust with a decentralized system logged to a publicly viewable blockchain.
The Bitcoin bases are more computational rather than human, being linked with mathematical
algorithms that make the structure safer, as an intrinsic need of Bitcoin functionality.
This paper exploit trust as a contributing factor for cryptocurrency market growth, considering
the level of trust invested by the users in a new technology as a very important factor of the
cryptocurrencies’ adoption, especially in the crisis circumstances of financial distress. Bitcoin, as a
result of the blockchain technology, can be associated with a speculative investment, which is by
its very nature, extremely risky. In the same time, Bitcoin security has particular capabilities as the
bitcoin wallet can be backed up in different ways and customers are not exposed to fraudulent
actions due to its decentralized model. This approach relies on the independent validation of
transactions by miners through consensus, which is a completely decentralized security
architecture.
The blockchain technology improves the efficiency, removing the system incompatibilities and
speeding up the payments in a real time view of all transactions. The data is stored in multiple
nodes of the system, feature that increase the resilience of the data through a replicated database.
But, the most important, Bitcoin is sustained by a more honest mechanism, where questionable
changes are immediately detected, function that requires a deep investigation of trust in the
blockchain technology. According to this view, the computational algorithms are used as
authenticity certificates for the uneditable trading records, being a relevant explanation for the
investors’ behavior on the cryptocurrency market. This paper contributes to the growing economic
literature on this subject, treating trust as a single point of disrupting financial third parties’
monopolistic actions and potential source of agreement in an unknown environment.
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2. Theoretical background - Blockchain impact in terms of trust
Blockchain is a technology that increases transparency by its decentralized mechanism, reduces
costs and have significant influences for various economic sectors in terms of efficiency, enabling
solutions to issues that otherwise could have not be solved. Innovative blockchain initiatives were
provided in health system, financial inclusion, energy, climate and environment, followed by
philanthropy, democracy, governance, agriculture and land rights. One of the most popular benefits
of blockchain is related to trust as blockchain is perceived as a proper method to reduce risks and
fraud – 38% (Galen et al., 2018, p. 4). Blockchain is the underlying technology that advanced
cryptocurrencies, being a secure record book of transactions organized in “blocks” of data, which
form a “chain” linked to other “blocks”. The blockchain technology has revolutionize the markets
by using smart contracts, creating trust without a intermediary-party, through three main elements:
(1) identity, which is referenced to the digital signatures; the transactions are authorized by a set of
public – private keys that are similar to the password and the account number of a traditional
transaction. (2) ownership, through the cryptographic hashing; each block contains hashed
representations of data from the previous block, which makes the system reject all fraudulent
attempts to manipulate the information which is already stored into the chain; (3) verification,
through the distributed consensus; it makes the verification process more feasible replacing the
trusted intermediary with a group of people that can publicly verify the truthfulness of a specific
transaction.
Blockchain has no single controller of the data, which makes impossible to alter the data
without the consensus of the other participants of the network. Furthermore, blockchain has the
advantage of real time transactions and no need to reconcile the trades by a third party, increasing
efficiency and transparency. Every piece of data is added to the final blockchain after the consensus
of the parties, which aligns the participants to a single version of the event. Data concentration has
a potential risk from external attacks to internal disruptions, while trusted third parties are
expensive and often quasi-monopolistic. A study conducted by DBS Asian Insights in collaboration
with DBS Innovation Group suggested a three-scale trust evolution: (1) first level is a mutual
distrust, which leads to minimal business opportunities; (2) the second stage use the third party and
is associated to some business opportunities, but also risks, complexity and more expenses; (3) the
final stage is correlated with high levels of trust and the use of blockchain; it reduces the
complexity and risks and increases the business cohesion (Lewis et al., 2016, p. 11).
3. The cryptocurrency market: Bitcoin
The Bitcoin background starts with the Satoshi Nakamoto paper entitled “Bitcoin: A Peer-to-
Peer Electronic Cash System” (2008) and its decentralized system without a central authority that
validates the transactions. Instead of the third party, the system uses a Proof-of-Work algorithm to
arrive to the consensus. In fact, Bitcoin was essentially a product of mistrust, in a time when
“mistrust of the handling of this crisis by financial institutions, central banks and governments was
growing” (Craggs, 2017, p. 13). Bitcoin has the advantage to unify the markets to a digital
economy, where the Governments must adjust to the new conditions, more competitive and
responsible. Bitcoin was the starting point for some important technologies that have the potential
to transform the global economy through its informational features.
According to the Figure 1, the Bitcoin market is still in its infancy and has some cyclical trends
of evolution, with an explosion of price in December 2017 (19.166,98 USD – 17.12.2017). Since
then, the Bitcoin price has slowed down, tried to recover in 2018, but has been clearly declining at
the end of the year. Until march 2019, there has been a low level of volatility of the prices,
suggesting an accumulation phase before the next strong decrease. In the period April 2019 – June
2019, there was a soft increase of the Bitcoin price, reaching the maximum point in July (12.335
USD – 09.07.2019). This local peak emphasized the decreasing trend which was very similar with
the one observed throughout almost the whole of the year 2018.
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“Ovidius” University Annals, Economic Sciences Series
Volume XIX, Issue 2 /2019
Figure no. 1. Bitcoin price evolution in the period 2014-2019
Source: https://www.coindesk.com/price/bitcoin
The BTC price fluctuates around the level of USD 7.000, while the total market capitalization of
Bitcoin totalizes over USD 132 billion. The Bitcoin price at 26.12.2019 was USD 7.323,18 and the
24-hour volume was over USD 21 billion (Figure 2). Given the repeatability of the two cycles, it
can be assumed a continuity of the decreasing trend under a limited volatility, followed by the next
wave of boom which may reach the psychological barrier achieved in 2017. On the other hand, the
BTC dominance is about 68,7% and Ethereum, the second most important cryptocurrency after
Bitcoin, has a market capitalization of USD 14.045.977.871, which is approximately ten times less
than Bitcoin.
Figure no. 2. Bitcoin statistics for the period 2014-2019
Source: https://coinmarketcap.com/currencies/bitcoin/
Bitcoins are produced by computers and use a system that enables payments based on
cryptographic methods. The Bitcoin system is composed by users, miners and the authoritative
ledger of all transactions. The “wallet” holds the private and public keys that allows the Bitcoin
investors to access the addresses. The miners add new Bitcoins to the money supply through
consensus, validating new transactions and including them in the blockchain, according to a peer-
to-peer network. Miners solve mathematical problems in order to validate the transactions, using
algorithms and being rewarded for their work. Bitcoin is more than a computing innovation,
designing a powerful mix of bitcoin protocols – distributing mining – blockchain technology.
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4. Results and discussions
Starting from the Bitcoin evolution during 2017, when it experienced a kind of bubble, followed
by a sharp decrease of prices, Ferreira and Pereira (2019) evaluate the contagion effect between
Bitcoin and other major cryptocurrencies using different time-scales, concluding that there is a
more interconnected market at present than in the past. These results are in line with previous
works of Beneki et al. (2019), which emphasize a correlation between Bitcoin and Ethereum, or
Silva et al. (2019), which identified a contagion effect of Bitcoin in almost all cases of the sample
(50 cryptocurrencies with greater liquidity).
The Bitcoin technology rises multiple issues in terms of trust, its architecture being based in the
same time on scrutiny and anonymity. While the transactions are publicly archived on the
blockchain, the identity of the users is undisclosed, due to the cybersecurity models and
cryptography. Trust is seen as a subjective belief in the truth or honesty of someone/something
(Grandison and Sloman, 2000), being emphasized the distinction between three forms of trust
(Misiolek et al., 2002; Leppanen, 2010): (1) technological trust, which is related to the usage
benefits, usability and individual perceptions of user’s skills; (2) social trust, referring to the
disposition towards trust and the dependence on the others and (3) institutional trust, which is
influenced by the power relationship and organizational trust based on hierarchy.
Sas and Khairuddin (2015) propose a symmetry between the two frameworks for exploring
levels of trust in the Bitcoin technology and across various stakeholders: Governments, users,
miners, exchanges and merchants. In this respect, users are those people which use Bitcoin in their
transactions and are subject to security risks, having limited knowledge about the blockchain
technology. Merchants are those businesses which accept risks due to the unknown identity of their
buyers, being engaged in positive transactions with the Bitcoin’s owners. Both exchanges and
miners are essential for supporting the merchants’ and users’ trust in Bitcoin transactions,
providing the trading platforms for Bitcoin and recording new transactions through solving crypto-
puzzles. The regulatory international framework of the cryptocurrency market is becoming
increasingly relevant in the current global debate, dominated by a lack of consensus on the topic.
The fundamental link of Bitcoin with the Governments designs a sophisticated mechanism without
a central authority, where disputes are solved through peer-to-peer protocols.
5. Conclusions
The cryptocurrency market is based on a fundamentally novel mechanism, which has the
potential to fulfill various functions for its users. We formulate the main advantages for the
blockchain technology in terms of trust, investigating its role compared with the traditional groups
of assets. We construct our hypothesis related to five major categories of stakeholders
(Governments, users, miners, exchanges and merchants), investigating the security risks associated
and reporting trust as a crucial point of the analysis. Bitcoins are mined through public distributed
nodes of the blockchain network, while miners have a catalyst role on the market. The core of the
mining process is the trustless mechanism of transactions in a transparent way, due to the
cryptographic features of the system and sophisticated algorithms. Once the transactions are
verified, they are added on the blocks and recorded in the blockchain ledger. The unregulated
nature of transactions, the lack of a financial third-party authority and the consensus protocols that
are used are features of the Bitcoin technology that significantly differ from the e-commerce
systems. Future research can be directed to exploring security threats for each category of
stakeholders, with a special focus on the miners’ practices and their involvement in the process.
6. References
• Beneki, C., Koulis, A., Kyriazis, N., Papadamou, S., 2019. Investigating Volatility Transmission and
Hedging Properties between Bitcoin and Ethereum. Research in International Business and Finance,
48, pp. 219–27.
• Craggs, B., 2017. Information Bias and Trust in Bitcoin Speculation, Lancaster University, [online]
Available at:
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