What is the safest way to escrow my money before purchasing bitcoins?

Question

While investigating the process of purchasing items with bitcoins, one site that I was learning about suggested, if you don't have bitcoins, visit LocalBitCoins.com and buy some.

OK, that made sense. I don't have any bitcoins yet and have not yet invested in any mining hardware, so going someplace to buy some is necessary.

Then I started investigating the exchanges and how they work.

I'm accustomed to AmeriTrade. I transfer money to AmeriTrade, they facilitate the buy-and-sale of stocks, etc. Sellers know the money exists because Ameritrade has it and verifies it. Buyers know they'll get what they're paying for because AmeriTrade has that, too.

However, that does not seem to be the case on LocalBitCoins.com. It appears they don't want anything to do with escrowing the USD, only the BTC, and that appears to open them up to fraud. It's one thing to hand my banking info to AmeriTrade, but to hand it to some one with a pseudonym who could be living anywhere in the world?

Question: What is the most reliable way to escrow cash before making a BTC purchase?

It almost appears there isn't any. People seem to want either face-to-face cash delivery, mailed cash delivery, Moneygram or Western Union transfers (ugh, expensive), or even gift card solutions. All of this appears, well, mickey-mouse to the extreme. It's like the old west where no one is willing to be "the bank."

Answer 1

Sites like localbitcoins.com (and eBay!) rely on reputation scores to assuage the type of concerns you express.

If a user on localbitcoins.com has a high number of succesfully completed transactions, with a 100% overall score, I think you can feel reasonably reassured that this user is reliable and will do the right thing. They have a respectable track record of performing as expected.

If you are buying bitcoins, in fact you do not have to give your fiat (dollar) banking information out at all. Many bitcoin sellers will accept cash, either in person, or deposited at their bank - so they would have to give you their banking information. Unfortunately, many traditional fiat banks are restricting cash deposits into user accounts from anyone but the named account holder. (Perhaps because they sense their obsolescence versus the security, speed and de-centralized nature of cryptocurrency.) So, verify that the bank you are depositing into will accept cash deposits from third parties. There are other ways to pay for the bitcoins you are buying, as you point out, such as "Zelle" (https://www.zellepay.com/how-it-works) and others. Check the localbitcoin.com adds for the different ways sellers of bitcoin may accept payment.

Interesting that nobody wants to be "the bank". I think that is one of the beauties and reasons-for-being of crypto. There really is no need for banks, once you can receive, and send crypto on your own, from your own machine, with its own wallet. It obviates the need for third party intervention, really. Paying someone with crypto is like handing them cash, but it can be done electronically world-wide.

Maybe what you have here is a business opportunity for such an escrow company. One that will hold fiat deposits to secure transactions between seller & buyers. It would receive fiat from buyers of crypto, and release the funds to the sellers of crypto when it verifies (by monitoring transactions in the blockchain) that the agreed-upon crypto has been deposited into the buyer's crypto address...

Crypto funds are "kept" by the coin's entire peer-to-peer network in public addresses, and exist everywhere worldwide where any peer in the coin's network keeps a copy of the blockchain: aka, the shared-ledger which accounts for the creation and transfer of coins. But only the owner of the each address should have the private key that can spend the funds in that address. (Make sure to keep the private keys to your addresses truly private !)

It's even possible to print out your private key on paper, and erase any trace of it from a digital device, making it impossible for any hacker to abscond with your funds. Cryptocurrency is very similar to cash in this regard. Your private keys are literally the keys to your funds. If someone takes or copies your private keys, they can spend your crypto funds. This would be analogous to leaving fiat cash lying around somewhere where it can be stolen. Just keep those keys (in most wallet apps it's the 'wallet.dat' file in the .bitcoin directory) safe and secure and you will be fine.

Best of Luck

Answer 2

The answer really depends on your definition of "safety" in transactions. However, I assume you are looking for a similar escrow service in a stock exchange. Many businesses, huge ones in-fact, are competing with all sorts of colorful offers to get a share of that "banker" rule for the trading of crypto-currencies.

Despite many online sellers and buyers, these exchanges do not offer to buy or sell anything themselves; instead, everything in their business is based on offers of sell or buy from their customers. You'd be able to find many of them with a quick google search for "bitcoin exchange".

Just like your example of Ameritrade and what we know as "stock exchanges", crypto-currency exchanges are usually open to the public to trade crypto-currencies against each other and against regular money which is usually referred to as FIAT money in these exchanges.

They usually require their customers to properly identify themselves, and then transfer and deposit their money or their crypto-currencies to the exchange. Then they allow each customer with a positive balance, to place an offer to buy or sell a certain amount of another crypto-currency for a certain price of their choice and up to the available funds or bitcoins or crypto-coins of the customer. As a result, the exchange will have a live list of offers to buy and sell between pairs, like BTC/USD or ETH/BTC (for ethereum to bitcoin trades).

Exchanges maintain the list of offers and execute two opposite offers/orders against each other whenever the price tags match. They also usually keep their list of offers open to their customers and sometimes even to the public.

For example, if I transfer 1 BTC to an exchange, I can open a sell offer to sell up to 1 BTC for any price I want. Now if I open a BTC sell order for $10000/BTC while every other offer is for $10005+, I'd be on the top of the list of sellers. And if at the same time you open a buy order for $9999/BTC while all other offers are for less than $9995 per BTC, even though your offer would be on tp of the buyers list, nothing will happen until either of us change our mind to match the price of th other one. In this case, lets assume that you'd see the list of sell offers and realize that with adding only one dollar to your offer, it would match my offer. And lets assume, you'd do it. Then the following steps will happen:

1. The exchange will remove your offer and my offer from the list of offer and instead a transaction will be created for $10000/BTC and a volume of 1 BTC
2. $10000 will be deducted from your deposits in the exchange and will be added to my deposits
3. 1 BTC will be deducted from my deposits and will be added to your deposits in the exchange
4. Depending on the rules of the exchange, one of us or both of us will pay a transaction fee to the exchange. The fee usually gets deducted from the deposited BTC or FIAT.
5. The current price of bitcoin will be announced as $10000/BTC in the exchange
6. ... and finally, if we have used a big exchange, many sellers and websites will adjust their BTC prices based on the price of our trade as the last trade, or an average of the last couple of trades of one or more exchange.

Once you are satisfied with the status of your account, you'd be able to close all offers/orders and withdraw the balance on your account, like your bitcoins and remaining money to your bitcoin wallet and bank account.

Remember that the before withdrawal of your bitcoins, they would be remained in the wallet of the exchange. And the exchange transaction fee of exchange has nothing to do with the transaction fees of the bitcoin network. You'd have to pay the bitcoin transaction fees when you deposit or withdraw your bitcoins to and from the exchange. Most exchanges have some other fees for different methods of deposit and withdrawal.

And one last note: Always research the reputation and all rules and policies of the exchange before even opening an account.