While being a tremendous proof of concept, the distributed cryptocurrency Bitcoin is fundamentally flawed as an alternative money system, critics say. It is now time for truly radical monetarists to build on this technical experiment and move to the next level of the monetary revolution: a truly human-based digital monetary system. 

Since its launch in 2009, Bitcoin has turned from a crypto-anarchist project into a hype topic in the worldwide web community and beyond. From London's squats to Berlin's Kreuzberg neighborhood: not everyone uses Bitcoin, but everyone is talking about it. Bitcoin can be described as a peer-to-peer cryptocurrency, in other words a distributed monetary system that enables anonymous and relatively secure transactions without any centralized authority. Instead of being issued through an opaque banking system, Bitcoin units are created by each of its users, thanks to an open-source software and a smart algorithm that makes the whole distributed system secure and anonymous. As a result, there is no need for a centralized authority to run Bitcoin. Instead, the system controls itself.

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Everyone agrees that Bitcoin is an amazing proof of concept from a technical standpoint, and has succeeded in raising much awareness for the current flaws of the monetary system. But does Bitcoin really address these flaws? More and more prominent economists and net activists say no.

"A system designed to create bitcoin billionaires"

Bitcoin faces two types of criticism. The first is technical: Bitcoin is an anonymous and authority-less currency, which is eventually of great help to drug dealers, weapons sellers and anyone operating on the black market. Dropis' founder Sebastiano Scròfina also listed several others criticisms, but the most crucial one is more economic than technical: it is related to Bitcoin's design as a currency.

"Bitcoin is designed by people who believe in a certain type of economy, it is designed to be like gold, privileging hoarding" Michel Bauwens, P2P Foundation

Bitcoin can be described as a deflationary currency, or even a mere (virtual) commodity. Like gold, bitcoins are valuable because of their scarcity -- Bitcoin's money supply is limited to 21 million of units. A feature, according to libertarians and gold standard advocates, yet a bug for many. The prominent Greek economists Yannis Varoufakis recently posted a very smart paper explaining the problem this causes:

To put it simply, if bitcoin succeeds in penetrating the marketplace, an increasing quantity of new goods and services will be traded in bitcoin. By definition, the rate of increase in that quantity will outpace the rate of increase in the supply of bitcoins. In short, a restricted supply of bitcoins will be chasing after an increasing number of goods and services. Thus, the available quantity of bitcoins per each unit of goods and services will be falling causing deflation."

Which is bad, Felix Salmon says:

Inflation is bad, but deflation is worse. The reason is that in a deflationary environment, no one spends money — because whatever you want to buy is sure to become cheaper in a few days or weeks. People hoard their cash, and spend it only begrudgingly, on absolute necessities. And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.

Another way to put it: since bitcoin units are being created at an increasingly slower pace while more and more users join the currency, the value of each unit can only rise. Thereby, new entrants only have a smaller share of the Bitcoin monetary mass -- unless they are rich enough to buy more bitcoin against official foreign currencies.

Bitcoin is about creating asymmetry and inequality where there is none," concludes Financial Times' journalist Izabella Kaminska, "It’s a system designed to create bitcoin millionaires.

The Bitcoin elite: 78 entities

Those Bitcoin millionaires are not a myth. By examining the entire Bitcoin graph (pdf) as of July 12th 2011, researchers Dorit Ron and Adi Shamir have found very insightful results. First, they estimated that 59.7% of the Bitcoin coins are dormant, which means the majority of the coins are saved rather than spent in the system. Second and more interesting, they found that 97% of Bitcoin accounts contain less than 10 bitcoins, while a handful of 78 entities are hoarding more than 10,000 Bitcoins. Last but not least, the researchers identified only 364 transactions with more than 50,000 Bitcoins. "All these large transactions were descendants of a single transaction which was carried out in November 2010," their paper concludes.

So basically you have a group of happy few people controlling the vast majority of all Bitcoins. But who could these guys be? Well, some further research led by Sergio Lerner suggests that one of those bitcoin millionaires is the mysterious Satoshi Nakamoto, the alleged inventor of Bitcoin. Since Nakamoto was most certainly the first Bitcoin user to make a transaction, Lerner could trace all of his account's activity and found that he must own about 980K Bitcoins, which equal about 110 million dollars with today's exchange rate. If you are unsure what to think of this, here is Wikileaks' Julian Assange's take on the issue:

That means that you should get into the Bitcoin system now. Early. You should be an early adopter. Because your Bitcoins are going to be worth a lot of money one day. -- Julian Assange, June 2011

How would Bitcoin help the Greeks?

"How would Bitcoin help the Greeks?" asks Scròfina cynically. In terms of wealth inequality, one could expect better from an alleged 'P2P currency'. The Greek economist Yanis Varoufakis draws the conclusion that the idea of a "de-politicised currency capable of ‘powering’ an advanced, industrial society" is a fantasy. He argues:

Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects while tilting the balance from speculative to transactions demand for bitcoins? To do so we would need a Bitcoin Central Bank, which will of course defeat the very purpose of having a fully decentralised digital currency like bitcoin."

Does it mean the idealistic project of a decentralized currency is dead? Not all Bitcoin detractors agree. Michel Bauwens — whose institution, the P2P Foundation made use of Bitcoin very early — has also sensibly withdrawn his support of the digital currency and expressed strong criticism during a talk at OuiShare Fest in May 2013. But contrary to Varoufakis, he remains optimistic:

Thank you Bitcoin for doing this, because now we can do something better -- Michel Bauwens, P2P Foundation

A statement warmly applauded by the audience, reflecting two days of intense discussions around virtual currencies, and a wide consensus on the need for something else.

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After Bitcoin and beyond scarcity

At a panel at OuiShare Fest on Virtual Currencies, everyone agreed on the principle that next currencies should be based on trust, and help the real economy. But where to start? "We need to dismantle the idea that money should be a commodity, a store of value" Dropis' Scròfina says. In these interesting slides, he argues for a post-scarcity money system:

An analysis Izabella Kaminska mostly agrees with:

We must stop thinking in monetary terms, we must look at the real wealth that surrounds us. The overall growth in the standard of living of the world. The wealth is there, it just needs better distribution.

Like Varoufakis, Kaminska thinks this is the role of public institutions. But can this be done with a stateless decentralized currency? Many alternative digital currencies projects are attempting to achieve this. Litecoin and Freincoin for instance, are two projects forked from the Bitcoin source code, with tangible differences though. The first one has a larger money supply (up to 84,000 million units) which makes it easier to mine, while Freicoin — which means "Free Money" in German — can expand up to 100,000 units. On top of that, Freicoin has a demurrage fee: the coins lose about 5% of their value each year. The website explains:

Demurrage forces the entire stock of money to circulate irrespective of the desire of the wealthy to accumulate and store; banks, financiers, and corporations can no longer hoard money waiting for higher interest rates or a more favorable investment climate as the demurrage acts as a tax on stagnant money. Money is eternally losing value, so the incentive is to spend it as quickly as possible on the necessities of life or to invest in longer-term ventures that also provide stimulus for a growing economy, typically creating real jobs in the process.

Another project called Ripple was mentioned many times to me when working on this paper. Ripple is not only a virtual currency, it is above all a payment protocol that can be used with any currency like Bitcoin, or even Euros and Dollars. What Ripple does is enhance P2P payment systems based on already existent social networks by turning them into trust networks and transaction pathways.

The French project called Open Universal Dividend Currency (open UDC) is even more radical. "In Bitcoin, the peers are the computers, not humans" Michel Bauwens said at OuiShare Fest. Open UDC, however, is just the opposite. Like Bitcoin, Open UDC is a decentralized protocol for currencies that prevents double spending and fraud. But the major feature of this currency is the fact that every member of the currency will periodically receive the equal dividend of money, similarly to a basic income. How does it work? Unlike other digital currencies embedding a basic income like OCCCU, the alternative currency powered by Occupy Wall Street, you don't even need demurrage or taxes to give money to people. Open UDC simply issues the money, 'out of thin air' -- but not in a foolish way. Open UDC is not operational yet, but the ratio of money creation would be defined by an algorithm, determined by two factors: the number of participants using Open UDC, and the average life expectancy within the community. The idea in Open UDC is that throughout his lifetime, every member should get the same relative share of money creation than everyone else. As a consequence, "the monetary mass is continuously expanding and thus prevents a minority to hoard too much units at the expense of the others." a contributor of the project explained to me. "The system makes enough room for the new comers, so that anyone can start trading without having to go into debt in the first place." Hence the description of the project on the official website: "OpenUDC implementations allow human members to exchange digital goods and services with a spirit of equity in space, between members, and time, between members and future members."

Changing the culture of money

Is the perfect currency at hand then? Sebastiano Scròfina is more nuanced: "In theory Open UDC would work, but in practice, it's not enough to have the protocol. You need a community of people that trust each other first." It is ironic that the success of Bitcoin is actually based on the opposite concept: mistrust. Bitcoin is made so that people don't owe each other anything. They just carry out transactions and disappear.

Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto. It’s nihilistic, and an attractive alternative only to things which are downright bad. — Felix Salmon

At this stage, you may wonder: if Bitcoin is so bad, why do so many people use it? It's probably because in the end, money is a question of Culture: as long as people think that money should be a commodity, they will prefer currencies that allow accumulation, speculation and competition. Fortunately, the growing sharing economy is surely changing our culture by creating more and more abundance and reassessing the human as an essential unit of the economy. If we truly believe in the values behind the collaborative economy, it is time to push our ambition further and create the decentralized, human-based currency systems that the emerging new economy deserves.