Just because a lot of people use DiVX doesn't mean we should. As I said, you'd have to convert your video anyway, because it has to be resized for the screen.
The only way to prevent people from being able to go through folders on your iPod is to actually encrypt them. If you want to do this, do it from your computer. If you're encrypting them from Rockbox, that means you're carrying the decryption key around with you, and they can extract it. It's fake security, and if you have any real reason for security you should use better.