The issue with traditional crypto exchanges is that they can be slow, expensive, and often lack transparency. They can also be vulnerable to hacks and other security threats.
Complex charts and dozens of different buttons that’s what on the mind of almost everyone when someone says crypto trading. But it can be done easier, and that’s with peer-to-peer (P2P) trading.
P2P trading offers a decentralized approach to crypto trading. Promising higher transparency and lower fees. It is the most straightforward method of trading you’ll find, without the need to understand charts or technical analysis.
In this article, we’ll take a deep dive into P2P trading in crypto, explaining everything you need to know to get started. We’ll cover what it is, how it works, and what are the benefits involved. Let’s dive in!
What is P2P Crypto Trading
Peer-to-peer (P2P) trading refers to a decentralized approach to buying and selling cryptocurrency, whereby you transact directly with the counterpart.
This trading method differs mainly in security from centralized exchanges. On CeX, you’re trading through an intermediary that controls your funds during the trade. With P2P, you are bypassing this middle agent, transacting directly with each other.
When you decide to buy crypto on a P2P marketplace, you’re usually presented with a list of sellers. These sellers can have their own payment terms and also set their own prices. And you are free to choose from any of them.
Is P2P Trading only a Crypto Thing
No, P2P trading is not exclusive to the cryptocurrency ecosystem.
The concept of P2P trading, or rather a peer-to-peer something, which involves a direct transaction between individuals, has been around for decades and has been modified for use in almost every industry.
Here are a few examples of P2P outside the crypto realm:
- P2P Lending: You lend money directly from a friend without the involvement of banks or financial institutions.
- P2P File sharing: When individuals share files directly with each other without the need for centralized servers or intermediaries.
- P2P Marketplace: Also Facebook Marketplace, eBay, or Craiglist can be considered a P2P trading platform. Since it allows users to buy and sell items directly with each other. The platform mainly just facilities communication and payment processing.
But although P2P offers a more cost-effective and efficient way to buy and sell items, it’s not widely popular. But it has the potential to disrupt traditional retail and e-commerce business models.
How does P2P Trading Work in Crypto
Before we get to the complex explanation of crypto P2P, we can give you a little insight by giving you a real-life example. And let’s say you want to buy a house.
You can go to the broker’s office. The broker acts as a middleman, connecting you, as a buyer, with the seller. But the broker usually takes a commission, and this deal comes with quite a high fee.
Or you can buy the house directly from a seller without the broker. The whole deal is closed directly between two people as a peer-to-peer exchange.
When you are buying crypto on a P2P marketplace, the platform only serves as a medium for connecting buyers and sellers.
Once you enter an agreement, a smart contract releases the funds to the seller and the crypto to the buyer and verifies the transaction.
A smart contract is a computer program that does something when predetermined conditions are met. In this case, when you enter into an agreement.
In traditional finance, banks or other financial institutions are responsible for transferring the funds, here, the system runs on an automatic computer program.
Advantages and Risks Involved in P2P Trading
Pro 1: Decentralization
The biggest advantage of P2P crypto trading lies in decentralization.
The whole system operates without the need for intermediaries such as banks or financial institutions. This results in a more efficient and transparent trading experience. But also gives users greater control over their sensitive data.
Pro 2: Greater Control
Not only you get greater control over your data, but you also have control over all the aspects of the deal.
You can directly dictate the terms of the transaction and choose the one that is most convenient for you.
Pro 3: Low Trading Fees
P2P trading often comes with close to no fees, as it eliminates the need for intermediaries.
If you are using a platform like Binance P2P for your trading, you’ll pay a very low fee. But you can also transact directly with the people, arranging the deals yourself and paying zero fee.
Pro 4: Increased Security
P2P trading platforms typically hold funds in escrow until the terms are reached, providing a high level of security and helping to prevent fraud or other malicious activity.
Pro 5: Global Reach
P2P platforms give you access to the whole global market, allowing you to transact with anyone from anywhere.
Con 1: Exchange rate Risk
The prices on the cryptocurrency market tend to jump up and down daily. But as P2P trades are facilitated based on the agreement between the two parties, it can result in significant losses on both sides.
For instance, you can agree to buy BTC for a given price, but before the trade is finished, the price could be thousands lower.
Con 2: Low Liquidity
For traders seeking to buy or sell bigger amounts of their digital assets, P2P platforms might not be ideal.
These platforms are often accompanied by limited liquidity, meaning that there may not be enough buyers and sellers to match the desired traded. This can result in delayed trades or, in some cases, the inability to execute trades at all.
Con 3: Risk of Fraud
This type of trading involves the risk of transacting with unknown individuals who may be unreliable or engage in fraudulent activities.
For instance, when someone buys crypto from you using a stolen credit card, the amount can be refunded. But not from the exchange but from you.
Therefore, you must always make sure that the counterparty is trustworthy. That’s also why P2P platforms usually have some kind of review system.
P2P in Action. How Can I Get Started with P2P Trading?
Binance is one of the most popular exchanges worldwide, so chances are that you are already using it. That’s why we’ll take a look at all the different buttons and features you can expect from a P2P platform using Binance.
If we take a look at the P2P trading screen, it can look something like this:
At the top of the screen, you can select the FIAT currency you want to trade with and specify the payment methods you want to use.
- Now, if you look at the highlighted trader. We will move from left to right, mentioning all the different numbers and buttons.
- First, we have the trader’s name — which is erased for security reasons in this photo;
- Below that, we have written how many orders he has already received and how many of them have been filled;
- Next to it, we have the seller’s price per BTC;
- Furthermore, how much cryptocurrency the trader has available and the corresponding maximum order;
- Lastly, what payment methods the seller accepts.
As you can see, on a P2P platform, you can choose from many different offers, the one that suits you the best. And you are in direct control of:
- The price;
- The person you are buying from or selling to;
- The payment method you use.
Frequently Asked Questions
P2P trades can be traced through the public ledger. However, it cannot be traced to you personally by skipping the verification process required by the exchange.
For instance, if you choose a P2P platform that doesn’t require identification, your transaction can be traced, but it won’t lead to you personally.
P2P trading can be safe if certain security measures are taken.
The greatest risk of P2P crypto trading is the fact that you are transacting with an unknown individual who may be unreliable or engage in fraudulent activities.
However, P2P platforms often come with a review and reliability system that highly reduces this risk.
P2P trading is indeed profitable if done right. As you are in direct control of all the terms of the trade, you can make a nice profit by accepting deals under the market value.
Another widely used method to make a profit on P2P is arbitrage. You can accept undervalued deals on one platform end send them on another.
P2P trading in crypto provides a decentralized and efficient method to trade your favorite coins while being in direct control of the exchange terms.
While it comes with a long list of advantages, it also has some big cons. Especially the risk of fraud.
However, this form of trading is nothing new, and the chances are that you already used any form of P2P. For instance, Facebook Marketplace or Craiglist can be considered a P2P marketplace.