Problems During Person-to-Person Transactions
Most transactions are straightforward and successful, especially if the seller has an established history of legitimate transactions. However, in the rare cases that problems arise, two types of complications tend to occur.
One is getting robbed on your way to the coffee shop: This happens when the seller has set up a meeting simply as a ruse for a convenient robbery. To avoid this scenario, be cautious if a seller asks for too many details about your appearance or the type of car you drive. These questions should raise a red flag.
The other dangerous scenario plays out as follows:
• You: "Okay, here's the envelope with my $500."
• Fraudulent Seller: "Okay, I just sent the bitcoins to your address. We're done!"
• You: "Hold on a second; I didn't get a notification that the money arrived."
• Fraudulent Seller: "I sent it properly. You're a beginner and don't know what you're doing. Now you're going to have to wait an hour for the money to show up because blah blah blah. I can't wait here all day; it's your fault you messed this up. Gotta run." (The fraudulent seller then tries to hurry out the door with your envelope.)
Again, this type of scenario rarely happens and is of course outright theft. You can avoid it by dealing only with sellers who have a solid reputation. You can also avoid it by relying on a Bitcoin escrow service, as discussed next.
A Face-to-Face Bitcoin Purchase with Escrow
One of the benefits of Bitcoin is that the Bitcoin blockchain has a built-in scripting language that allows you to use some convenient and secure techniques that are impossible with other types of money. One such technique is a multi-signature transaction, which gives you additional safety when performing Bitcoin transactions with another person. A multi-signature transaction requires multiple people to agree to a payment before it can be completed. In finance-speak, this allows you to set up a Bitcoin escrow service. An escrow service is a third party that holds on to an amount of money and makes sure the transaction goes smoothly before releasing the cash. However, a multi-signature transaction is more elegant than a traditional escrow service. Theoretically, a conventional escrow service can abscond with the money, but this is impossible with a multi-signature transaction.
This is because the third party does not actually have full control of the money—it is merely an arbitrator that can only make a binary decision as to whether or not the buyer or seller deserves the funds. Also, because multi-signature transactions are baked in to the Bitcoin system, they are very inexpensive to use, if not free.
Even though multi-signature transactions are technically a slightly separate concept from escrow services, we'll still use the term escrow service for the remainder of this discussion.
Currently, the most popular way to set up a Bitcoin escrow service is to use Bitrated (bitrated.com/), which is free at this time (although you need to choose an independent arbitrator, some of whom charge fees).
In addition, be aware that LocalBitcoins.com offers a similar escrow service, although it does not use Bitcoin's multi-signature feature. Therefore, you would need to trust the LocalBitcoins.com website with your money. Also, it is more expensive than using Bitrated.
It's also technically feasible to set up a similar escrow system without an arbitrator.
Instead of requiring the arbitrator to side with the buyer or seller to process the transaction, the buyer and seller can commit to a multi-signature transaction where they have to agree with each other. However, the money simply ends up in a black hole if a dispute transpires between the parties involved. The benefits of using this system are saving the expense and avoiding the complexity of dealing with an arbitrator. But this type of escrow is less popular because of said black hole.
Because most person-to-person transactions are completed without a Bitcoin escrow service, you'll need to make sure the seller agrees if you intend to use this service. Not everyone is familiar with this concept yet. If you and the seller agree to use the service, your face-to-face transaction should go as follows:
1. The Bitcoin seller sends the bitcoins to the escrow service.
2. As the buyer, you verify that the bitcoins are in the escrow account as promised.
3. You hand the seller your envelope of dollars (or other fiat currency).
4. The seller signs off on the escrow, and you get your bitcoins.
As a result, at no time can the seller abscond with your dollars without sending bitcoins.
If meeting with strangers one-on-one makes you uncomfortable, you may be interested in going to a Satoshi Square event. Several major cities, such as New York, San Francisco, Boston, Toronto, and Vancouver, have had regular live Bitcoin exchanges where large groups of people meet in public spaces to buy and sell bitcoins. These meetups are also called buttonwood exchanges, named after the buttonwood tree under which the original Wall Street traders supposedly traded in the 1700s.
Still Don't See a Buying Option That Works for You?
If none of the options discussed in this chapter meet your needs for acquiring bitcoins, you have another alternative to acquire bitcoins that is probably better than any other: Sell something to bitcoiners for bitcoins! Die-hard bit-coiners dream that someday they'll be able to relinquish all fiat currencies. Someday, we can imagine, you won't need to buy bitcoins with other money, because bitcoins will be the money.