Greed isn't good: 3 reasons not to bite on bitcoin

Bitcoin is blowing up, especially among the tech set, but the virtual currency's strong points are also its liabilities

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Reason 2: Middlemen will muck it up

Which brings us to the second reason for Bitcoin's eventual demise: greedy middlemen. Bitcoin was designed as a peer-to-peer currency, which means it's not subject to governments, banks, or any kind of transaction intermediary. You can buy, sell, or trade bitcoins with anyone, anywhere, instantly as long as they have an Internet connection and you're not beholden to any authority in that transaction.

But that's not to say folks out there aren't trying glom onto bitcoin transactions for no fun but much profit. All the hype has prompted a wave of venture capital funding to startups looking to build exactly the kind of leeching middleman profit model that bitcoin was designed to avoid.

The latest bucket of funding (which, ironically, comes in dollars, not bitcoins) is the record $25 million that went from venture capitalist firm Andreesen Horowitz to startup Coinbase, which provides a bitcoin digital wallet service that "facilitates bitcoin transactions" between consumers and businesses in exchange for a 1 percent fee -- the very definition of "middleman." There are and have been numerous bitcoin-related ventures in the past, including BitPay, Coinlab, MyBitcoin, and Mt.Gox, to name but a few. Their business models vary, but all are shaving some kind of money off an increasing volume of bitcoin transactions, and not with 100 percent security either.

Reason 3: Secure and anonymous -- on the Internet?!

Which segues into reason three for bitcoin's bombing: It's billed as totally secure and anonymous -- but it's neither. If you're expecting more security with a virtual currency based on unbreakable cryptography than you're seeing with our greedy, evil, white-cat-caressing financial institutions here in the meatspace, you'll soon be bleeding and blubbering just like my poor editor. Bitcoins are every bit as susceptible to evildoers as the U.S. dollar, though in different (and sometimes not so different) ways.

MyBitcoin, for example, turned out to be fraudulent. Bitcoin exchanges like Mt.Gox have been hacked. It seems that a common model for stealing bitcoins is to initiate a massive denial-of-service attack as a smokescreen and make off with bundles of bitcoins in the confusion. Alternatively, crooks may open a bitcoin wallet service, wait till people deposit lots of coins into their accounts, then shut the site down, take the coins, and vanish.

The bitcoin community warns you of these dangers and advises you not to trust online wallet services (there goes Coinbase) and instead store your bitcoins yourself, only keep them encrypted and air-gapped from the Web. Of course, if your computer or USB hard disk or cloud storage site decides to crash, your bitcoin fortune disappears right along with your email inbox and your family photos. That's the equivalent of taking your retirement savings, stuffing it into your mattress, and tearfully watching your house burn down when junior has an accident with his chemistry set. Sorry, there's no FDIC insurance for mattress money or bitcoin bits.

Lastly, there's bitcoin's inherent anonymity -- a myth like Fenris or Justin Bieber's likability. In a fantastic post that explains how bitcoin transactions work, author Michael Nielsen points out at a level of detail that had me bleeding and blubbering (brush up on public key cryptopgraphy, digital signatures, and crypto-hashing before reading) that bitcoin transactions can be "de-anonymized" and probably already have been, which is one possible reason why criminal sites based on bitcoin economies, like Silk Road, are being brought down. The fact that bitcoin is so often connected to illegal activities because of its purported anonymity, especially money laundering, is also making a lot people wonder if it will even remain legal in the long run.

Do I want the meager ducats I'm paid for my pearly words of little wisdom dished out in bitcoins? Not so much. I'll stick with the dollars I've got and the evil, soulless financial devils I know, thanks. If they become too much, there's always my mattress.

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This article, "Greed isn't good: 3 reasons not to bite on bitcoin," was originally published at Follow the crazy twists and turns of the tech industry with Robert X. Cringely's Notes from the Field blog, follow Cringely on Twitter, and subscribe to Cringely's Notes from the Underground newsletter.

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