Buying products online with bitcoin can be secure when using the right platform or leveraging a bitcoin escrow service when the other party is unknown. But what does that mean compared to traditional online shopping protocols? To answer this question, let’s first consider how secure it is to use bitcoin.
Why can we be sure blockchain is secure?
Bitcoin is secured using a technology known as the blockchain. Blockchains rely heavily on cryptography to achieve data security and ensure duplication of coins does not occur. Many features come into play; however, the most common are likely consensus and immutability. Consensus refers to the nodes’ ability across the blockchain to validate transactions and achieve an agreement based on an underlying algorithm.
The second feature, immutability, refers to the inability to tamper with transactions that miners on the blockchain have confirmed. These transactions include the transfer of funds from one wallet to another wallet, such as purchasing products online. Taken together, the consensus and immutability of the blockchain provide data security that many believe to be far more secure than traditional payment methods, which can be reversed or tampered with.
Purchasing with bitcoin
While the technology has unique security protocols, it is also important to note that bitcoin is entirely anonymous, similar to paying everything in cash. Therefore, users can buy and sell things on digital platforms without providing any personal details. The only time users may have to provide more information is when certain exchanges or wallets are being used and require a Know Your Customer (KYC) verification. KYC protocols are dependent on the exchange and may be optional in some cases, depending on the users’ preferences.
Anonymity may be a beneficial feature; however, a bitcoin wallet will not come with any government guarantees. So it can be of concern that hackers will corrupt the cryptocurrency exchange platform, or your coins could get lost or stolen. In these cases, users run the risk of not ever seeing these funds again. The safekeeping and purchasing of bitcoin are likely riskier than the buying of a product or service.
Finding a retailer
Once a user has found a secure exchange and a safe place to store their assets, it then comes down to the retailer’s security. A growing number of retailers will accept bitcoin in exchange for goods. Selecting a large, reputable company to spend your bitcoin on may be the least risky choice. Options currently include Newegg, Overstock, and a variety of Shopify stores. Purchasing on lesser-known websites can be just as risky as any other online purchase and will require some caution to be exercised on the purchaser’s part. Basic protocols might be reading the company information on social media or third-party reviews from previous customers.
If a user cannot find a retailer, services can still facilitate safe transactions between unknown parties. Most commonly, transacting parties refer to this service as an escrow service. An escrow service verifies the buyer’s funds and secures them in a trust account for the seller. The seller then ships the merchandise with the guarantee that the funds are with a safe third party. Sellers do not get paid until the buyer has the opportunity to fully inspect the merchandise. Although an additional fee is associated with this service, it can be among the most secure way to conduct a transaction for large ticket items.
Conducting secure transactions with bitcoin
The next piece in secure transactions is the safe storage of bitcoin before engaging in a transaction. We can compare a bitcoin wallet to a standard wallet that holds cash. Most people do not carry large sums of money in their wallets. People tend to do this as a security protocol since if someone were to rob them on the street or they lost some of their funds, it wouldn’t be a devastating loss. Likely, people keep the majority of their life savings in a secure account. Although, people may keep a few small bills in their wallets as a backup.
Users should be wary of any service designed to store money online (bitcoin or fiat currencies). Many exchanges have suffered from security breaches in the past and only provide some insurance that may only cover a fraction of the funds you have at your disposal. The safest type of wallet is typically known as a cold wallet. A cold wallet is a cryptocurrency storage option that exists separate from the internet. Some examples are a hardware or a paper wallet. Paper wallets are a piece of paper that contain the public and private keys of a user. Of course, when it comes time to buy a product, funds will need to be moved to a hot (or online) wallet. Therefore, users planning to buy products online with bitcoin should be well versed in both types of wallets to minimize opportunities for fraud and stolen funds.