Thursday, June 27, 2013

Using LocalBitcoins.com to Help Grow Bitcoin Adoption

This is the first in a series of posts designed to help Bitcoin users get started with LocalBitcoins accounts.

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One of the biggest problems standing in the way of increased Bitcoin adoption is the difficulty of buying them. It's a constant complaint you hear anywhere new (or aspiring) Bitcoin users gather.

Companies like BitInstant, Coinbase, etc. are working to make this easier all the time, but that's never going to be a complete solution because they can only add capacity so quickly and sometimes the process of adding new capacity can cause their website to be down for a couple weeks. In addition, there is always going to be a huge group of people who are not as savvy as the earlier adopters who aren't going to feel comfortable using BitInstant themselves no matter how much they improve their process.

For those reasons, it's enormously helpful if existing Bitcoin maintain active ads on LocalBitcoins so that when new users want to buy their first Bitcoins they have an easy way to find someone willing to help them through the process.

I've been selling on LocalBitcoins for several months, and what I've learned is there is an enormous market out there of people who want Bitcoins but just won't feel comfortable without some personalized hand holding. Those people are willing and happy to pay a markup that allows you to take the cash they give you, go through BitInstant or Coinbase yourself, and replenish the Bitcoins you sold them at a small profit. It's entirely possible for a person who is trying to accumulate Bitcoins in the long term to also sell and replenish them as a way of helping to bring in new users.

One thing you should know about local sales like this is that it's not a viable business. You won't lose money, but as an individual you'll never move a sufficient volume to earn more than a pittance in profit. Think of it as a hobby and as a vehicle for new user support and promotion. Meet new people, talk to them about Bitcoin, teach them how to buy them directly through the same services you use, and invite them to your local Bitcoin groups. I've almost never sold bitcoins to the same person twice on LocalBitcoins but I'm still quite busy over there because of the sheer number of new users who are learning about Bitcoin every day and want it. They hear about LocalBitcoins via news articles or web searches and we need to have people there ready to help them.

Here are some tips I can share based on my experiences of what works on LocalBitcoins. The information will necessarily be US-centric because I don't know what services are available in other countries and how they work:

First, if you haven't done it already set up accounts on Coinbase, BitInstant, CampBX, and Dwolla. Complete the AML verification where applicable, and make small purchases on Coinbase and CampBX to start their respective 30 day probation periods.

While you're waiting 30 days to be fully capable of replenishing the bitcoins you sell, open a separate bank account, ideally one with business hours that make it convenient to deposit cash on the evenings and weekends. Link this bank account to Coinbase, Dwolla, and BitInstant and store an initial balance of 1.0-2.0 times the maximum value of a cash BTC purchase you are willing to facilitate. What you're going to do is hold that cash as a buffer in your bank account, then when somebody buys Bitcoins from you you'll start a Coinbase order for the same amount, and then deposit the cash you get from the sale into the bank account. This protects you from exchange rate risk as much as possible. You don't want to sell a Bitcoin for cash today, wait around a couple days and then decide to replenish when the price is now significantly higher. On the other hand you don't want to have more fiat sitting around than you need to be able to float the 3-5 business days Coinbase is going to take to release your new Bitcoins.

Once you're ready to go it's time to set up an account on LocalBitcoins and start listing your services. Important things to think about about here are the text of your advertisement, and the pricing formula. When it comes to the text of the ad, Make sure to include contact hours, location details, and specific instructions. Be as clear as possible about your expectations in terms of time to complete a transaction, and where you are willing to meet.
I've also learned that developing a robust pricing formula takes a bit of work as well. For example, one might naively expect the following to yield good results:

mtgoxUSD*1.06

That formula will produce a 6% commission above Mt Gox latest, but if you use it long enough you'll discover two problem:
  1. Mt Gox is sometimes down, so your formula won't work correctly.
  2. There are people out there who will try to high frequency arbitrage on your formula. The way this works is they watch for a sudden drop in the Mt Gox price and then enter orders on LocalBitcoins on the ads whose exchange rates immediately drop as well. If the price quickly recovers they'll complete the sale and immediately sell those bitcoins on Mt Gox, putting you underwater on the trade after consuming your time to go and meet them to complete the sale.
Problem 1) can be solved by looking at more than one exchange.

max(mtgoxUSD,cbxUSD)*1.06

Now your formula takes the higher of Mt Gox or CampBX. This logic could be further chained to include more exchanges, but for simplicity we'll leave it there.

Problem 2) can be solved by including the 24 hour moving average as a factor as well:

max(max(mtgoxUSD,cbxUSD), USD_24h)*1.06

Now the formula responds immediately to sudden increases in the exchange rate, but gradually to drops in the exchange rate. This is fine because you're here to help new users buy their first Bitcoins, not service high frequency traders.

Another problem will come up during times when the price is increasing very rapidly, such as in March and April of this year. Even with a relatively generous commission, it's possible for you to end up underwater on the trade during the time it takes for you to coordinate a meeting and make the exchange. One way to solve this is to include a term that accounts for volatility:

USD_24h+(1.5*(mtgoxUSD-USD_24h))

That statement will project the current spot price to value that is 50% further away from the 24 hour moving average than it already is. Adjusted to include multiple exchange it looks like this:

USD_24h+(1.5*(max(cbxUSD,mtgoxUSD)-USD_24h))

and finally it can be added to the previous equation for a complete formula:

max(max(max(mtgoxUSD,cbxUSD), USD_24h),USD_24h+(1.5*(max(cbxUSD,mtgoxUSD)-USD_24h)))*1.06

I've been using equations in this form for a while now and they work very well in practice.

Another thing to consider is communication. Meeting up in person requires some finesse and coordination, so it's helpful to give the person a way to contact you in real time, like a phone number or an email address. I initially included this information in the ad itself, and found it to be a bad idea because I got spammed by people who wanted to negotiate different terms than what I included in the ad and got aggressively hostile when I declined. Once someone has initiated a contact you can respond to them with a number they can send text messages. Using Google Voice for this is a good idea. It goes without saying that meetings should be in busy public places and not dark alleys or your own home for everyone's safety.

Similar principles apply if you also want to sell online as well as in person. For example, if you offer a Dwolla ad then you'll be able to take up some of the slack during times when services like BitInstant are overloaded and you can help people other people get Bitcoins immediately who are still in CampBX's 30 day probation period. Keep 1.0-2.0 times the maximum value of the online purchase you are willing to facilitate as a balance in your CampBX account, and every time you make a sale on LocalBitcoins execute a Spend-X order for the same amount at the same time. Periodically you'll need to move received dollars from your Dwolla account to CampBX and move the Bitcoins you bought back to your LocalBitcoins wallet.

Note that experience has shown that it's dangerous to sell Bitcoins online via any payment method, and you run the risk of having accounts closed if someone sends you a fraudulent payment. It's probably not something you should start off doing, and if possible you should only allow people you know and trust to buy you from this way. You can do that by keeping your online ad disabled most of the time and only enabling it long enough for your friend to enter the order. (hopefully future revisions to the site will make this easier) In any case never leave more money sitting as a balance in any service (including your bank account) than what you could afford to lose in a worst case scenario.

I want to encourage everybody to set up and maintain ads in their local area to help grow Bitcoin adoption. We'll get new users a lot faster if there's a place they can go to find people willing to help them out in person for their first BTC purchase. You can use the trade as an opportunity to share your own knowledge, make new personal and business connections, and recruit another person to help do the same thing for the next wave of users. That's how we sustain an exponential adoption curve needed to get Bitcoins into the hands of the other seven billion people in the world.

About the Author:

Justus Ranvier is a Bitcoin activist and freelance author who has had some modest success using LocalBitcoins and wants to help others achieve the same thing. He can be contacted via his Google Plus profile.

2 comments:

  1. I would not recommend meeting in busy public places, unless they are totally controlled access behind metal detectors/x-ray machines & armed guards/law enforcement. Those are the only likely places to stay safe. CCTV & defenseless bystanders will not help you getting robbed.

    California's definition of burglary: entering a structure with the intent to commit a felony (or a petty theft) once inside.

    Burglars fear armed homeowners, so do whatever you legally can to decrease their occupational health and safety.

    With some exceptions based on jurisdiction, you are allowed to defend yourself with effective tools inside your own home, where in public you may not unless you pay a bribe to be able to possess them outside your home. You may also run higher-quality surveillance cameras at your own home, just in case a stupid criminal decides to invade your castle, where you know the layout better than anyone else.

    For the non-criminal person who comes to a home, if the person at the home robs you, then law enforcement knows exactly where to find the perp. There is a very low probability that this will happen, because a successful robbery and fleeing will require the criminal at the home to also be a burglar/trespasser, and perfect murderer.

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  2. Great article. I plan on adding these safeguards to my algorithm. I added a rounding algorithm for $5 increments round((mtgoxUSD*1.1+5)/5)*5. This only works for whole coins, but I think it gives a friendly cash-transaction number.

    (Note: there is an issue if an exchange rate was exactly at a $5 increment already, but I think that probability is quite low).

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