How safe is bitcoin? After several months of testing bitcoin services, I can conclude that the digital currency is both important and strong as a concept and as a system, though it can fall prey to weaknesses in the proprietary software of exploitative ad-hoc businesses around it. Here's a snapshot of the experiences that led me to this opinion.
Following an article I wrote several years ago, I found myself with a handful of bitcoins donated by kind readers (if anyone wants to donate again to fuel further investigations, please send to 16Nri1FS4sRKPuv1SMt4GtGuCCLVUdFcku). Using my small stash, I've been trying a wide range of bitcoin services to see how well they perform. I have yet to find any that are open source, which means I've been left at the mercy of the geeks -- probably supersmart ones -- behind them.
[ Has the face of bitcoin really been unmasked? | See which open source projects are off to a great start in InfoWorld's top 10 new open source projects of the year. | Track trends in open source with InfoWorld's Technology: Open Source newsletter. ]
Since last November I have tried Coinbase, CEX.IO, Kraken, Bitstamp, Mt. Gox, and a few others. Coinbase is a payment provider akin to PayPal. CEX.IO is a commodity exchange providing bitcoin mining shares. Kraken is a trading exchange designed like a day-trading console and handling multiple crypto currencies. Bitstamp is a bitcoin-only trading exchange, as was Mt. Gox prior to its recent demise. All offer to hold bitcoins on your behalf and are thus "wallet" services too. There are many, many other services in these categories; these are just samples, albeit pretty good ones.
To start with the most notorious exchange, I was lucky with Mt. Gox; the "service" around user registration and authentication was so complex, slow, and arbitrary that I was never able to fully use it, despite attempting registration over a period of several months. Thus, I lost nothing when it folded recently. Every encounter I had with Mt. Gox raised concerns with me, and it's unlikely I would have risked much there anyway. The fact that its deposit, withdrawal, and validation processes were all calibrated in days or weeks rather than minutes or hours was the biggest red flag, indicating manual processes and "discretionary" handling.
After Mt. Gox, I had the most problems with Kraken, a multicurrency trading system. Despite its cool website, most of its advanced trading features are disabled due to lack of volume in the currency pairs traded -- only bitcoin-euro has any volume worth mentioning. I successfully sold a bitcoin on Kraken in November, but Kraken was unable to send me a check for the proceeds. That experience offered deeper insights into the service as I tried to deal with it.
Over time, a picture of manual, half-hearted, part-time operations emerged. I corresponded with Kraken regularly, getting hollow promises from customer support representatives and waiting days between replies. Finally, Kraken's team admitted it was not capable of handling U.S. dollar transactions and offered customers a free exchange of their dollar balances into euros (amazing for a San Francisco-based company). I was then able to make an automated transfer to a European bank account. While Kraken's recent public admission of failure is refreshing, I'm unlikely to use it again soon.