My great bitcoin adventure: 6 months, 5 exchanges

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.

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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.

By contrast, Coinbase were easy to approach, easy to set up, and able to rapidly send payments for my bitcoin sales to both a U.S. and a European bank account. Coinbase was not only problem-free, but its customer service was both efficient and respectful — a rare combination among exchanges. I was able to use Coinbase to trade bitcoin into dollars without problems. I expect to use Coinbase again as a way to handle bitcoin donations for the various nonprofits I support.

Unlike Coinbase, Bitstamp and CEX.IO faced many questions from me. Fortunately, their customer service teams were highly responsive and expert, if prone to suffering fools badly.

CEX.IO allows you to buy shares in bitcoin miners — which it calls GHashes — then have the newly mined bitcoins and namecoins credited to your account as they emerge. But the value of the GHashes has proved unstable, tumbling dramatically when mining difficulty rises, and any substantial investment you make there needs to be watched carefully — and preemptively converted back to bitcoins ahead of any increases in difficulty. If you don’t do this, the loss you make on mining shares will far outweigh the profits you make from mining crypto currency.

You’d never be able to discover this for yourself, because CEX.IO provides only one month (maximum) of price history. Right now you can see the price of GHashes has been falling, but you can’t see the way it crumbled by half overnight back in February. The main issue I have with CEX.IO — indeed, with all of the services I contacted — is the lack of visibility into the processes, software, and dynamics of the service coupled with a hostility to anyone who dares ask questions. I’m still using the service, but every day is an adventure.

This is the aspect of bitcoin that needs attention. The algorithm published by Satoshi Nakamoto in 2009 is open to scrutiny and criticism and is standing the test of those many eyes, as is the open source reference implementation of it found in bitcoin-Qt. The twin forces of transparency and open source seem to be serving bitcoin well. It still has much potential both in itself and as an example of a distributed, peer-authenticated ledger. This concept is the real innovation.

But the exchanges and ancillary services are a different matter. They are all proprietary and run by supergeeks, usually with covert ownership and operations and often exhibiting hostility to enquiries. Their business operations often seem slapdash and amateur, no doubt reflecting a lack of respect by their founders for seasoned businesspeople. They are ripe for hacking, and their lack of business rigor and operational transparency means the first anyone — perhaps even they — know about a flaw is when it’s too late to fix.

Bitcoin has plenty of life in it, and the bright daylight of open specifications and open source is probably the best regulation it can get. But the exchanges? They need to get their act together and build user trust through transparency and business rigor.

This article, “My great bitcoin adventure: 6 months, 5 exchanges,” was originally published at InfoWorld.com. Read more of the Open Sources blog and follow the latest developments in open source at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.