You Could Become the Next Person to Lose Bitcoins

NEW YORK (TheStreet) -- Bitcoin investors are on a wild ride, one that I think is perfectly illustrated by the following illustration of a generic bubble from trader Brian Shanon's book, Technical Analysis Using Multiple Timeframes:

Used with permission from Brian Shannon

Right now, I think bitcoin investors are at the "complacency" stage. The virtual currency may weather upcoming challenges, but I expect things to get worse before they get better.

Instances of bitcoins disappearing because of technical glitches or theft have become so rampant that now a second bitcoin exchange has halted bitcoin withdrawals, and you could become the next victim. It appears bitcoin investors can't catch a break lately.

Bitstamp joined Mt.Gox in halting bitcoin withdrawals, making it the second significant bitcoin exchange to do so as a result of technical issues. These events have helped pressure the virtual currency's value to about half of its December highs. Bitcoins could recently be had for about $540.

According to Mt.Gox:

"A bug in the bitcoin software makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of bitcoins to a bitcoin wallet did not occur when in fact it did occur. Since the transaction appears as if it has not proceeded correctly, the bitcoins may be resent."

That alone should worry every potential and current bitcoin investor, at least the ones who have money at exchanges, but there are many ways to lose virtual currency. Jim Edwards described a reportedly eye-popping $220 million bitcoin loss to users of underground Sheep Marketplace only three months ago. Last year, the writing was on the wall after BitFloor, another exchange fell victim and lost 24,000 bitcoins.

BIPS, one of the largest European-based bitcoin payment solutions providers lost more than 1,200 bitcoins (worth about a million dollars at the time). Bitcoin wallet inputs.io reported it lost over 4,000 bitcoins. The question every bitcoin investor needs to ask is that if these large, well-funded companies are falling victim, what's the risk that you'll lose your holdings?

One way to calculate a baseline of risk is to review virus and malware data. A report by PandaLabs suggests that almost one-third of U.S. computers are compromised by malware and or viruses. The good news, if you want to call it that (it's not for bitcoin), is the U.S. doesn't even rank in the top 10 of malware-infected countries. South Korea tops the list with an infection rate of more than 50%.

One recently notorious virus called the "police virus" infects a victim's computer, takes control and subsequently demands a payment. This one single virus is infecting about 1,000 computers a week. Apparently, about 3% of victims pay a little more than $100 each, and it's made millions for the cybercriminals.

A virus that steals your keys for bitcoins is even better from the cybercriminal's point of view. After your computer and or mobile device is infected, a virus can lay dormant until it detects Web usage that suggests you bought bitcoins.

Then, maybe when you're not at the computer, it transfers the coins, and because transfers are so difficult and time- consuming to track, you're left with an empty bitcoin wallet. The risk is so real that it probably played a significant role in Apple's (AAPL) decision not to embrace bitcoin in its app store.

If you're a bitcoin bull, I know you're thinking that your computer is secure, and you take all the necessary precautions to ensure you don't suffer a loss. However, in order for bitcoin to grow into a mainstream payment method (thereby increasing the value of bitcoins), Joe six-pack who isn't security-vigilant needs to trust he isn't going to lose his money.

As greater numbers of people buy bitcoins, their computers become increasingly attractive for cybercriminals to target. The expansion itself makes it clear why bitcoin will have trouble moving beyond a fascination with speculators.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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