1. Bitcoin could be the tip of a dangerous iceberg

What is the future of money? Whether they involve jangling coins, folding bills, swiping plastic or making a few simple clicks online, most of the ways people pay each other involve banks and national currency systems. So-called virtual or cryptocurrencies offer something different: decentralized payment networks that let people transfer money without middlemen.

Of the 400 or so digital currencies in existence, bitcoin is the best-known and most mainstream. There are 13.1 million bitcoins in circulation (each worth about $600, though like other currencies they’re divisible in much smaller units). The number of bitcoin trading accounts, known as “wallets,” reached 5.3 million in June, up nearly 700% from a year earlier, and about 63,000 businesses world-wide now accept bitcoin, according to CoinDesk, which tracks digital currency prices and news.

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Advocates of virtual currencies say that they reduce transaction fees and create a level playing field for people without easy access to brick-and-mortar banks. “Anybody who has a connected device, anybody who has a mobile phone, has a bank in their pocket,” says Barry Silbert, chief executive officer of SecondMarket and founder of the Bitcoin Investment Trust. For similar reasons, many people think digital currencies have enormous potential as investments.

But bitcoin’s recent history offers consumers many reasons to be wary. Unlike most traditional currencies, the value of a bitcoin can fluctuate wildly. And the collapse earlier this year of Tokyo-based Mt. Gox, the largest bitcoin exchange at the time, underscored the dangers of using or investing in an unregulated currency.

In a recent survey by research firm GfK, 79% of respondents said they would never use an alternative currency. And in a separate Harris Interactive survey released in March, only 6% said they would invest in Bitcoin rather than gold.

See also: Bitcoin basics: What you need to know.

2. We’re a tax nightmare waiting to happen

Virtual currency got a lukewarm welcome to the real world this March from the Internal Revenue Service. The IRS ruled that, for tax purposes, bitcoins should be treated as investments like stocks and bonds, rather than as traditional currency.

That’s a potential nightmare for currency users, because it could make any bitcoin transaction a “taxable event.” If your bitcoin rose in value between the time you obtained it and the time you used it, you could owe capital-gains tax—not something you need worry about when you pay with, say, a $20 bill.

3. Our hype is much bigger than our market share

There are more than 400 cryptocurrencies. Their collective value? Less than that of Burger King US:BKW.

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The market cap for 418 virtual currencies tracked by coinmarketcap.com adds up to $8.7 billion, compared with $9.3 billion for the hamburger chain.

While bitcoin may receive the most press, the cryptocurrency craze has birthed hundreds of other species, according to coinmarketcap.com, from Dogecoin to Kryptkoin and Philosopher Stones. Many of them are geared toward specific communities or interests, like RainbowCoin (with the ticker LGBT), CorgiCoins and BBQCoins.

These niche currencies tend to have equally niche valuations. Sexcoin is valued at about $115,000. RainbowCoin lands at half that amount, and SiliconValleyCoin is worth $210. By comparison, there was $11.4 trillion in official U.S. currency in circulation as of June (in the form of notes, bank-deposit and savings accounts, traveler’s checks and other funds), according to the Federal Reserve.

Bitcoin’s fate—and that of any virtual currency, for that matter —relies on people’s willingness to accept it, use it and think it has some value. Banks have yet to institutionally invest in bitcoin and other virtual currencies, but many on Wall Street are watching the phenomenon to see if the currencies come to be worth trading down the road. Bloomberg L.P., the financial data powerhouse, began listing bitcoin prices on its terminals in April because its clients were “increasingly interested in Bitcoin and other digital currencies and are looking for tools to better monitor developments in these markets,” according to a company blog post.

4. Our volatility could leave you broke

Fiat money derives its value from government regulation, and central banks can help control fiat currencies’ value relative to one another by buying and selling them. But virtual currencies behave more like stocks: Their value is very sensitive to how people perceive them, and can fluctuate wildly.

Bitcoins traded in mid-July for around $600 each. That’s down from a record of $1,147 in early December—and up from around $10 two years ago.

The fall bankruptcy of Mt. Gox, once the top bitcoin exchange, and winter arrest of Ross Ulbricht, the alleged creator of the bitcoin-only online black market Silk Road, sent the virtual currency tumbling. Ulbricht’s trial on charges of drug trafficking, conspiracy and computer hacking, among other charges, is scheduled to begin in November at a federal court in New York.

“Bitcoin’s an experiment, and [you should] only invest time or money that you can afford to lose,” says Bitcoin Foundation chief scientist Andresen. “It’s not a robust, mature platform that you should trust your life savings to.”

5. We’re fertile ground for fraud

New York state recently proposed virtual-currency rules that would require “BitLicenses” for people who trade, store or issue virtual currencies, along with disclosure, anti-laundering and security requirements. But for now, bitcoin and other cryptocurrencies are largely unregulated.

The Securities and Exchange Commission issued an investor alert last year warning that virtual currencies “may entice fraudsters to lure investors into Ponzi and other schemes.” It released the alert on the same day it charged a Texas man with man and his company for running a bitcoin Ponzi scheme—the first case of its kind. Trendon T. Shavers misled investors with promises of big returns while using their money to pay for personal expenses, according to the SEC. His trial on charges of violating antifraud securities law is slated for March 2015.

Five things bitcoin won't tell you

Wall Street’s industry-funded watchdog, the Financial Industry Regulatory Authority, has called bitcoin “more than a bit risky.” The self-regulator also warned investors in an alert that while banks and credit unions give customers safety guarantees, digital currencies offer no such protections, and that bitcoin platforms can be hacked, the money could be used for fraud and “as a result, consumers can—and have—lost money.”

Federal authorities shut down Silk Road last year, and they have also begun probing other bitcoin exchanges, The Wall Street Journal reported. In May 2013, the U.S. shut down Liberty Reserve, a Costa Rica-based digital currency network that they called a criminal money laundering scam.

“Those virtual currencies do not really know who their customers are,” says Tom Kellermann, chief cybersecurity officer at the security company Trend Micro. “Traditional money laundering has migrated over to cyberspace.”

6. Our little software problems can cost you big bucks

Mt. Gox, the bitcoin exchange, rattled the cryptocurrency world last fall when it said hack attacks and a software glitch caused it to lose 850,000 bitcoins. Mt. Gox, which filed for bankruptcy in February, later found 200,000 coins, but bitcoins worth almost $400 million remain unaccounted for.

Keeping ahead of hackers is no small challenge for programmers, computer security experts say. “Computer security is a process. You’re constantly improving things, fixing things,” says Andresen of the Bitcoin Foundation. He says the payments network is attempting to avoid the “too big to fail problem” of the financial crisis by creating a broad infrastructure that has no central points of failure.

7. You may have to print out your ‘digital’ money

Digital money, like any digital information, is vulnerable to hackers. One way to protect your virtual currency, ironically, is to keep it offline.

Mark Karpelès (second from right), president of the bitcoin exchange Mt. Gox, speaking at a news conference on the day the exchange filed for bankruptcy. AFP/Getty Images

Bitcoin users get unique “addresses” for their funds, with a private key akin to a password. Printing your password and placing it in a vault can help protect your bitcoin from hacking eyes until you need it for individual transactions.

Several services now offer to store bitcoins securely. Some services, like Xapo, say they fully insure bitcoins stored in their vault. Many of these digital currency-centric companies, like London-based Elliptic, hold bitcoins in offline mode with physical and cryptographic security. Bitcoinpaperwallet.com says it sells tamper-resistant physical wallets that fold. It’s worth noting, however, that these companies are new and lack long-term track records.

Andresen says the Internet currency needs a year or two of development on issues like security and user-friendliness before he would feel comfortable saying “yes, you could use bitcoin as your primary bank account.”

8. Our fees are low, but maybe not for long

One of the often-cited perks of bitcoin: It doesn’t cost much money to spend money. U.S. banks generate hundreds of billions of dollars in various transaction fees yearly. But virtual-currency transaction fees are typically lower than those of credit cards and wire-transfer services, and sometimes there are no fees at all.

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For merchants who can slash that processing cost, particularly on higher ticket items like electronics and precious metals, the digital currency is attractive, says Tony Gallippi, co-founder and chief executive officer of BitPay. More than 35,000 merchants use BitPay to process bitcoins, and Gallippi says some offer customers a discount for paying with bitcoin. “If you can save that 3% that you’re paying to the credit card company, that’s a huge impact on the gross margin of what you’re making,” Gallippi says.

Those low transaction costs might not last, however. As the costs of bolstering bitcoin against attacks and the expenses of mining the currency through mathematical algorithms increase, the near-zero transaction costs will eventually be “unfeasible,” according to a research paper published last month by Kerem Kaskaloglu, a cryptography instructor at Ozyegin University in Istanbul.

9. Currency ‘miners’ could mine your bank account

James Singleton, a digital manager at the Red Bull Music Academy in Germany, was coding one February afternoon and left his computer to go home at about 4 p.m. Three hours later, he received an email from Amazon saying his account had racked up a mysterious $2,600 bill, as well as 100 new, large databases that he never created in Dublin, Hong Kong, Tokyo and the U.S.

“I was furiously deleting these things,” Singleton says. But his account soon topped $5,100. Amazon removed the charges, he says, and told him the company had seen similar cases where people had infiltrated others’ accounts to mine for cryptocurrencies like bitcoin. “I can’t think of any other reason you might need to have that much computer power,” Singleton says.

Bitcoins are created through “mining,” a process in which computers solve complex math problems. It requires massive volumes of processing power and electricity, so some miners do it on somebody else’s dime. Some hackers are infiltrating peoples’ cloud accounts to set up data centers that mine for digital currencies.

Rob Ragan, a senior security associate at the security firm Bishop Fox, found that by scraping search engines, he could find users’ Amazon Web Services private keys—usernames and passwords. Hackers could access their accounts and control servers to set up mining operations. “There’s obviously a whole lot of money to be made by having someone else pay for all the power of your cryptocurrency mining,” Ragan says, adding that the process could run up a tab of up to $800,000 on someone’s cloud account.

A spokeswoman for Amazon Web Services called these cases “basic fraud” and declined to comment on how often they occur.

10. You might need us some day, like it or not

Merchants accepting bitcoins include computer-maker Dell, online publishing platform WordPress, barbers, bars, doctors and Latvia’s airBaltic. Despite bitcoin’s security issues, the fact that the system is relatively cheap is irresistible to many.

Virtual-currency fans like to compare electronic money—especially bitcoin—to the Internet in the 1980s: It’s an evolving project, and while it isn’t perfect, developers and investors are smoothing out the kinks. Says Gallippi: “Everybody’s kind of growing up together.”

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