Summary

Known as the ebay of bitcoin, Localbitcoins is a service matching bitcoin buyers and sellers within close proximity to one another, facilitating person-to-person transaction. Local Bitcoins provides an escrow service to ensure online transactions are executed fairly, and provides reputational scoring based on feedback.

Localbitcoin is often the best solution for bitcoin trading in jurisdictions in which banking or regulatory issues prevent the easy opening of online bitcoin exchange accounts. In the UK, for instance, Localbitcoins is an extremely popular method of exchange. And of course, there are some that prefer the anonymity possible with localbitcoin, seeking to avoid the KYC/AML requirements of the online exchanges.

Security

Localbitcoins has a proprietary wallet solution required for online purchases using their escrow solution. The localbitcoin wallet is web-based and the private key is kept on the localbitcoins server. They offer two factor authorization, and claim to keep “most” of their bitcoins in cold storage.

There have been a few notable security breaches of localbitcoins which have left the company’s image somewhat tarnished. In May 2014, the site was pulled offline for approximately 24 hours after a hacker entered the server console and gained root access. According to Localbitcoins, all hot and cold wallet coins were safe on a different server. Apparently, this was due to a weak hosting provider security, and localbitcoins quickly uncovered the hack and responded appropriately.

The month prior to that, there was a large controversy surrounding a reported wallet breach. After investigation, it turned out that an attacker gained access to a user’s android phone and was thus able to circumvent Localbitcoins’ two factor authorization.

In January 2015, a hacker used the LocalBitcoins’ live chat feature to spread malware to users. According to LocalBitCoins, this was most likely some sort of keylogging software. Three users lost funds during the hack, and were compensated by Localbitcoins.

Singling out LocalBitcoins for weak security in an industry which has been plagued with breaches is perhaps unfair, but there does seem to be a bit of a pattern with LocalBitcoins that should be noted. As is generally the case with exchanges, when not actively buying and selling on LocalBitcoins, it is preferable to keep coins in a secure, wallet-only service.

Gravitas

The founder and CEO of localbitcoins is Jeremias Kangas, and the operations are run from offices in Helsinki, Finland. Mr. Kangas has always been forthright about operations and his role.

Though localbitcoins releases no public financial audits, the business seems healthy with relatively high revenue with low marginal costs. The business model is transparent and scalable, and the company is working on expanding into new markets. When there have been security breaches in the past, the company engaged in self-audits, published the findings, and compensated any victims of fraud.

Opening an Account

To register an account, simply select a username, password and verify your email. Please ensure that a strong password is used – preferably with upper and lower cases, numbers, symbols, and a space or two – as this password will secure your wallet. Telephone verification is optional, but is recommended to add credibility to your profile.

Buying and selling bitcoins on localbitcoins

After logging in, click “buy bitcoins” which is displayed at the top of the site next to the logo, enter the sum you’d like to buy, your location, and your preferred payment method. The search results displayed below list all relevant sellers according to your selection. The reputational score is shown next to the user name, listing both a positive feedback score from 0-100% and the number of localbitcoin transactions the user has executed. If lucky, a seller will appear with a good reputation, and large number of transactions executed, who accepts your preferred payment method and is selling cheaply. If not, try adjusting the payments methods and number of coins you’d like to buy.

Once you’ve identified a seller, send a message with the number of bitcoin you would like to buy, expressed in fiat or bitcoin. Once a trade request is sent, buyer and seller can chat through the live chat functionality offered. Once the payment details are received, send the payment to the user keeping any records of payment, and mark “payment complete” on the transaction page. The seller will then be notified that the payment has been made.

When the initial transaction request was sent, the required bitcoins were moved into the localbitcoins escrow service. Once the seller has confirmed the payment has been received, the bitcoins will be released into your wallet from escrow. Afterwards, both buyer and seller are encouraged to leave feedback on the experience.

For the seller, the experience is basically summarized above, but exactly the opposite. After clicking “Sell Bitcoins”, search results with local buyers is displayed below with price, payment method and limit amounts, along with reputational score and number of trades executed. On the sell side, after a trade request is received for an online purchase, the bitcoins are moved into escrow for the duration of the payment window, which is usually 90 minutes. Once a buyer markets “payment complete”, confirm payment and the bitcoins will be transferred from your wallet.

Once the buyer marks payments complete, only a dispute can release the bitcoins back to the seller. From the seller side, the most likely dispute would arise from a buyer claiming to have sent funds which have not been received by the seller (Most likely due to transactions taking longer than anticipated). Disputes are manually resolved by localbitcoins. Once the bitcoins have been released from escrow, the dispute option is no longer available. Localbitcoins cannot help in the case of, for instance, a chargeback.

How to buy bitcoins for cash

In cash transactions, Locabitcoins simply provides the interface connecting local buyers and sellers. The details of meeting place and how payments are made is left to the user’s discretion.

Setting up an advertisement

Often buyers and sellers are unable to find an appropriate match in the existing search results, and would like to set up an advertisement, appearing themselves to relevant counterparties when searches are made. To create an advertisement, choose “post a trade” which appears just next to the buy and sell bitcoin options. Choose to buy or sell online or locally, enter your location and desired payment provider.

For sellers, please remember that the risk associated with payment methods vary. For instance, paypal which is obviously a popular choice for buyers, is extremely risky for sellers as buyers may reverse the payment several days after the transaction. The payment provider does not provide protection for digital currency according to its terms, so the seller has no recourse. These types of payment options should only be used with extreme discretion. Please refer to the “selling bitcoins online guide” located under info->guide for risk assessment per each available payment type.

After the payment provider has been selected, the price must be set. Localbitcoins provides a solution that adjusts the trade price according to hourly market price. There are a number of different equations that can be used to determine price, including taking the market rate of a chosen exchange and adding or subtracting a margin. For instance, a buyer could choose to lock the rate against bitfinex’s USD rate minus 2%. There are a number of complex equations detailed in the “pricing FAQ”, which is accessible through the trade advertisement page.

Additional fields such as minimum and maximum amounts and optional, and there is a box to list available hours for contact. The other information box is meant to display specific instructions like – counterparties are asked to request only when cash trades can be completed within two hours, or something similar.

An additional field, called “trusted people only”, allows advertisements only to a close circle of friends or trusted partners highlighted by the seller or buyer. This is particularly useful for sellers when accepting risky payment types.

A word on localbitcoin scams

Sybil Attacks

The reputational system of localbitcoins is susceptible to the so-called “sybil attack”, in which a user creates multiple accounts which transact with one another, leaving positive feedback. The large amount of transactions and overwhelmingly positive feedback can instill a false sense of trust in counterparties and the potential for fraudulent transaction. As multiple accounts are connected to the same individual, the scam can be replicated over and over again until localbitcoins spots the connections and closes the network. There is no information as to how this is managed by localbitcoins.

Escrow purgatory

A fraudulent buyer may send trade requests to a seller, triggering the escrow function on the relevant coins. While there is a 90 minutes window for payment to be made before the escrow is reversed, were a buyer to claim payments had been made only a dispute would release funds from escrow. The length of time bitcoins are held in escrow, then, is entirely dependent on how quickly localbitcoin support is able to ascertain that the buyer is claiming to have made a payment fraudulently. This is a tricky situation for localbitcoins. If they release the bitcoin from escrow and it turns out that the buyer did indeed make the payment, they have either facilitated a seller-side scam or undermined the integrity of the escrow system.

While this would have a negative impact on the buyer’s reputation, there is not much protection against someone using the sybil method described above. Such an attack could be made to eliminate supply in a competitive market.

The risks of cash transactions

For person to person transactions the overwhelming majority of experiences are positive, but there are risks involved. Of course, common sense safety measure should be taken, like meeting in a public place. However, short of violence, there are a number of scams highlighted on the internet that, while anecdotal, point to an underlying problem with person-to-person bitcoin transactions. Namely, you need to trust someone you don’t know to act honorably. The stories range from people simply walking out without paying after bitcoins have been transferred (how do you explain that to a cop?), to attempting to pass counterfeit bills. If you unfortunately come in contact with a criminal attempting to launder money, you could be held legally culpable, and you might actually be meeting with an undercover cop!

The point is, finding trusted buyers and sellers is extremely important. If running a sybil network, the reputational score might not be indicative. Use care when meeting with people and trust your instincts. If something doesn’t sit right, walk away.

Fees

Advertisers are required to pay a 1% fee for the purchase amount, paid from released escrows. There are no fees for cash transactions. There is a small fee for wallet transfer fees, approximately .0001-.0004 per outgoing transactions, and users that would like SMS notifications must pay .00015 per notification.

Mobile

Responsive design, mobile friendly. Fully functional from any mobile device.

Support

Support is extremely important at localbitcoins for dispute management. The team is professionally trained and helpful. There are of course anecdotal descriptions of botched dispute management that can be found online, but the majority of disputes are managed professionally according to internal guidelines.

You might be better off elsewhere if:

Reading this review made you nervous.

Face-to-face meetings and under the radar transactions might make some a bit skittish.  Provided you live in a bitcoin-friendly market, there are numerous mainstream bitcoin exchanges you can choose from. Otherwise, maybe have a look at bisq for an anonymous, online experience, albeit with “developing” liquidity.

You are a high frequency trader.

If you are looking to day trade bitcoin, localbitcoins definitely provides a good, anonymous way of getting your money into the market.  Once you own the bitcoin, you can transfer it to bitmex, bitfinex, or any other high volume, low fee exchange and trade to your heart’s content.

Bottom Line

Localbitcoins is the place for person to person transactions in cash or with a number of payment options not offered through exchanges. If you live in a jurisdiction with an underdeveloped bitcoin exchange market or anonymity offered by cash transactions is important to you, Localbitcoins is a great solution.