[Guest post, hope you enjoy. -brewster]
Burning Brewster’s Bitcoin
First Installment – Coinbase offers a service that is contrary to everything the company professes to hold dear
Morgen E. Peck
This fall, Brewster reached out to me with a proposition. He wanted to know more about what it’s like moving between bitcoin and fiat currencies—where the trades are happening, which ones are scams and which ones are legit, how long they take to go through, how much of my privacy I have to forfeit, and especially what kinds of fees traders are skimming from each individual transaction. In short, what’s it like for people who have no bitcoin and want to get in? And once they do get in, what options do they have?
To get the answers, Brewster sent me on my way with one bitcoin. He told me to sell it and buy it again in as many ways as possible, and not to come back until I had whittled his money down to nothing.
So. This is the mission. Find out how many licks it takes to get to the center of a bitcoin, or lose it all to thievery and grift (crrrruuunch!!!). We’ll be running updates on my progress through this blog with the hope of informing casual bitcoin users and digital currency gurus alike.
______________________________________________________________________ First Stop: Coinbase
Coinbase is a bitcoin “wallet” (I’ll explain in a minute why I put this word in quotes) merged together with an exchange platform. Most of the people I know who are playing with Bitcoin as a whimsical investment arrived at Coinbase as the first point of entry. I suspect this is because Coinbase accounts link up with external bank accounts, thereby offering an intuitive and familiar interface to the financial infrastructure with which we’re all so well acquainted.
After Brewster sent one bitcoin to my address, I opened a Coinbase account and used the blockchain.info browser-based wallet to dump my funds into it.
Before we even get started, I’d like to note that using blockchain.info is the best experience I’ve encountered so far in this little experiment and I want to hold this transaction up as the ideal that we can use to judge all future stunts. The only better option would be to handle my transactions with a full Bitcoin client.
What I like is that the guys at Blockchain.info have done everything they can to keep their software true to the heart of Bitcoin. I can set up a wallet without giving them my name or email address. The private keys are in my sole possession. Basically, it’s all on
me. If I lose the information that I need to access my account or I let it leak into the hands of a thief, well then I’m flat out of luck and I’ll probably learn to be more careful in the future.
This is what Bitcoin looks like without her makeup on, when she’s dragging herself off the couch to open the door for a package. And, the way I see it, she now has two options. She can either gussy herself up for people or she can try to teach people to accept her for who she is. I advocate the latter (and not merely because I’m wearing sweatpants as I type). I think that the best services will be the ones that leave most of the risk with the users while simultaneously taking pains to tutor them on how to manage key pairs, use cold storage, etc. In other words, part of what’s required in getting this whole Bitcoin thing to work is giving people a new way to understand digital ownership and, in general, just making people smarter. That’s not a bad thing.
Which brings me to Coinbase. As an exchange, Coinbase has functionalities, and therefore responsibilities, that surpass my blockchain.info wallet. It has to operate in conjunction with a world of passwords, bank account numbers and identity verification protocols, many of which are determined by federal regulations. But I still think it’s fair and instructive to ask whether or not the service retains any of the features that Bitcoin the network brings to the table.
What are these features? Coinbase lays out three of the most important ones right on the homepage of its own website. It touts Bitcoin as an open, global network, one which is “not controlled by any company or country,” (that’s #1) with transactions that are secure, “fast and cheap,” (that’s #2) which are processed without the need for collecting sensitive details about the user. “There is no need to give companies extra information or a blank check to bill you” (that’s #3).
Unfortunately, transactions made through Coinbase retain none of these properties. Not a single one. Unlike Bitcoin, Coinbase is a company and when you move your bitcoins to a Coinbase account, you give the company complete control over them. This is because, as I hinted at before, a Coinbase wallet is not a real wallet.
I know that Bitcoin has only been around for 5 years and the community is still in a tug- of-war over semantics. So maybe the term “wallet” is a work in progress. But it shouldn’t be. To me, it’s very clear what this word means. When we talk about wallets in the physical world, we’re talking about something we use to carry our cash around (and all the cursed things that accumulate in a billfold). The important thing about a wallet is that we have access to its contents. At any time we can reach in and pull out the money.
In Bitcoin, the proper analog for cash is the private keys that are used to sign transactions on the Bitcoin blockchain. Private keys are the only thing you really own in Bitcoin, and therefore, any real wallet should give you complete access to them.
Query Coinbase as to how to get your private keys and you will be directed to this message:
As Coinbase is a hosted wallet, we do not provide users with their private keys; doing so would prevent us from taking advantage of our secure cold-storage technology to protect your bitcoin funds.
Instead, you can submit transactions and sign messages using our web-based interface, bypassing the need for control of the private keys.
That pretty much does away with feature number one. Trust Coinbase with your bitcoins and you must trust them completely, because they give you no direct control. This is not a gateway to Bitcoin. It is a surrogate.
On to number two. Transactions processed through the Bitcoin network are fast and cheap. The transaction fees are mere pennies and the transactions themselves usually clear within an hour.
The same is true of a Coinbase transaction if all you are doing is moving money from one Bitcoin address to another. But buying and selling them is another matter completely. Hooking my Coinbase wallet up with my credit union account took days. Once that was settled, I sold my bitcoin across the Coinbase online exchange and waited for the money to land in my checking account. This took another four days, which is longer than I’ve waited when using other services like PayPal or Chase’s QuikPay bank transfer.
The fee was actually not too bad. I sold my bitcoin at $372.62. Of that, Coinbase took $3.88, which is just about one percent.
So, on to number three. Bitcoin is a payment network that eliminates the need for users to divulge sensitive information about themselves. Ownership is verified through strong cryptography that references pseudonyms rather than real-world identities.
This one you can definitely say goodbye to if you start trading on Coinbase and even if you just use their wallet. As I mentioned, the company now knows my name and my bank account number (which they also have the ability to dip in and out of), and my email address. In addition to that, I’ve given Coinbase my phone number in order to set up 2-factor identification. And because they possess the private keys to all of the bitcoins I store in my Coinbase wallet, the company can associate my identity with any transactions they process.
Everything that was attractive about the Bitcoin protocol has been sacrificed to make the Coinbase service user friendly in a way that simulates modern banking and that indulges the dangerous, but well-engrained notion that we are better off trusting professionals to secure our digital information than we would be if we took control of it ourselves.
I’m only picking on Coinbase because it’s the first online exchange I’ve used. I hope to take a look at more of them in the coming weeks and I suspect to find these strategies to be endemic.
But if I were to offer an opinion, I would recommend anyone who has any admiration for Bitcoin—and for what this technology is doing to disrupt traditional payment processors —to go ahead and use Coinbase to exchange between Bitcoin and fiat currencies, but to get in and out as quickly as possible. The fees are pretty low compared to what else is available. But once you start using Coinbase to process transactions on the blockchain, you’re throwing everything beautiful about Bitcoin out the window.
Next up, I hit the Bitcoin ATMs in New York City and the open air trading nights at the Bitcoin Center near Wall Street.