What is Peer-to-Peer (P2P) Crypto Trading?
6 mins read
3 mths ago
Bitcoin and several other cryptocurrencies were created with the original idea of Peer to peer exchange, that is the direct exchange of cryptocurrencies between crypto holders. However, over time people have come to focus on centralised and decentralised crypto exchanges. Crypto exchanges are firms or organisations where individuals or firms can easily buy and sell their cryptocurrency. People also have the option to hold their cryptocurrencies for an extended period on these exchanges.
However, users may face difficulties with some crypto exchanges since their trading platforms are difficult to understand and use to buy, sell, and hodl crypto. Yet, there is an alternative that many people are unaware of and that is trading crypto via P2P.
What is P2P Trading?
You can also sign up on a crypto exchange like Yellow Card and have the website immediately connect you with someone willing to sell or acquire bitcoins. The Crypto exchange is then regarded as a P2P exchange or platform. Users can also post ads to buy or sell cryptocurrency at a specific price range and through a predefined platform.
How P2P works
To better explain the difference between trading via P2P and. directly through a crypto exchange let’s use an example of a traditional shopping platform. When shopping on Amazon or Jumia you browse through the catalogue to find a product you like and check for the best price. You pay the funds directly to Amazon or Jumia without meeting or sharing details with the actual seller of the product.
The transaction is completed, that is you get your product and the seller gets their money without direct contact between you and the seller. This is how a crypto exchange works traditionally. The crypto exchange is the trusted third party that facilitates the transaction while protecting the identity of both the buyer and the seller.
However, when shopping on eBay or Jiji the process is very much different. You browse through a catalogue of products with the sellers' details displayed on the platform. You can contact the seller to negotiate the price or simply complete the transaction over the internet wherein you pay directly to the seller’s account and the seller sends you the product directly. This is much similar to p2p. The only difference is that rather than buying some products you are purchasing cryptocurrencies.
P2P transactions can also be facilitated off a crypto exchange that is, you can meet a buyer or seller outside a crypto exchange and complete a transaction. For instance, you may meet a seller or buyer via a Facebook ad, Twitter ad, or even someone on your contact list e.g on WhatsApp. You can then proceed to negotiate a price and once finalised the transactions are completed.
Peer-to-peer transactions mean that you have detailed information about the person or entity you are interacting with such as their name, crypto wallet address, bank account details, IP address, location, and in some cases may involve face to face meetings.
When buying or selling cryptocurrencies via a crypto exchange you do not have the option to negotiate the price and often use charts or market aggregators to determine the right time to sell and buy to earn a profit. P2P makes it easier to conduct arbitrage trading, that is buying an asset at a lower price on a platform and selling at a higher price on another platform. You can also post ads of your own to encourage people to patronise you. Some P2P crypto exchanges may even provide a layer of protection such as a feedback or rating system, in which your customers can rate you either positively or negatively.
Benefits of p2p trading
Although they are significant risks with P2P several people have taken to using P2P for several reasons such as:
- Minimal KYC requirement
Trading via a crypto exchange necessitates that you provide your personal details and identity verification to become a trader. However, p2p allows you to evade this process as you can complete a transaction directly with another crypto trader without the need for identity verification.
Several people still lack access to personal documents such as a passport or birth certificate, leaving them unable to complete KYC. Many others also do not have the funds to obtain a passport that is only valid for a few years.
At the same time, it is essential to remember that several people are unbanked or underbanked and do not have a bank which makes it difficult to trade via a crypto exchange. P2P covers this limitation and makes it easier to access cryptocurrencies.
It is worthy of note that some crypto exchanges now incorporate the p2p method of trading crypto and as such require customer verification.
- A diverse portfolio of cryptocurrencies
Some crypto exchanges may not offer some options of cryptocurrencies which is easier to access with p2p. As such, with p2p you can create a diverse portfolio of crypto coins to invest in.
- Diverse payment method
Using P2P allows you to enjoy a variety of payment methods that crypto exchanges may not allow. With p2p you can use PayPal, gift cards, and sometimes even cash payment for p2p which can be useful for those who prefer face-to-face transactions or those without access to a bank account.
- Zero Trading Fees
Some cryptocurrency exchanges may charge a fixed rate or percentage per trade however, with p2p you can complete transactions with zero fees.
- Profit from arbitrage
Arbitrage is the process of purchasing cryptocurrencies at a lower price in one place and then selling it at a higher price in another. Many P2P traders use arbitrage to make money in the cryptocurrency market. There are pricing fluctuations between exchanges, driven by volatility, liquidity, or even regional price variances which creates arbitrage opportunities.
In some regions of the world, the price difference in a certain cryptocurrency can be so extreme that if you have access to a cheaper price then you can make a profit. Arbitrage trading on peer-to-peer exchanges not only provides access to cryptocurrencies to those who otherwise would not have it, but it is also a simple and practical way to profit from the spread.
Challenges of Peer-to-Peer Trading
Although P2P offers several benefits such as total control over the process, it also poses certain risks that may lead to an altogether loss of your crypto asset and funds.
- Slower Transaction Speed
With traditional crypto exchanges, crypto transactions are conducted almost instantaneously once your payment is confirmed. However, p2p introduces a new risk and that is slower trading speeds. Cryptocurrencies are volatile and you can earn a profit from their price fluctuations, however, a delay in processing transactions may lead to a loss.
For instance, the person sending the fiat currency may have issues with their banking service while processing a crypto transaction or the person sending the cryptocurrency may get distracted and take longer in sending the cryptocurrency. This might sometimes be perhaps because they want to send the cryptocurrency when the price has dropped.
Sometimes, mid-transaction the buyer or seller may change their mind, necessitating that you have to spend time again finding a new buyer or seller and start the negotiations all over again.
- Low Liquidity
For high volume traders, P2P may not be the best option as there is often less liquidity, and as such high volume traders may have to reach out to several buyers or sellers before completing their transactions. This is why high volume traders prefer over-the-counter (OTC) trades or buying directly from a standard exchange that has higher liquidity.
- Crypto scams
P2P trading has introduced several crypto scams where individuals have lost their funds because of fraudulent persons under the guise of crypto trading. For instance, after sending funds from your account they may claim to have not seen the funds and therefore will refuse to release your crypto assets.
Another fraud is that after receiving the crypto asset and sending funds to your bank account, they call their banking service provider and inform them that they did not initiate that transaction. The banking service provider then initiates a reversal of the funds to their account resulting in a financial loss for you.
Tips on P2P trading
P2P may prove confusing and risky for a person who does not have adequate information about the process. These tips will make it easier for you to protect yourself from fraud and also easily access crypto via p2p.
- Communicate properly with counterparties to avoid unclarity that could lead to confusion and losses.
- Use a payment method you are familiar with
- Use a trusted p2p crypto exchange: The safest way to protect yourself is to use a reliable p2p exchange. The p2p platform is equipped to protect you and your counterparts from getting defrauded. For instance, the identity of each party is verified and kept securely such that one does not encounter dubious characters. At the same time, the p2p platform is built on a smart contract which ensures both parties fulfil their side of the transaction.
- Do not let absurd or low market prices entice you: Fraudulent parties often post low crypto pricing to attract people. Conduct proper research before being swayed by these prices.
- Confirm payment before releasing frauds: A good idea may be to ask for a screenshot of the bank transaction. This way the person cannot claim not to have completed the transaction.
- When conducting p2p via a crypto exchange platform ensure that communication is conducted within the app. It is not advised to move the conversation to a different platform as then the p2p platform cannot protect your interest.
- Keep a record of all communications so you can use them as evidence in case of a fraudulent act.
- Use a p2p exchange platform that is easy to use and if you are having challenges be sure to communicate the problem with their customer support.
- If you are having a face to face or cash p2p transaction be sure to meet in a public place and avoid informing the person of your exact residential address for security reasons. A better idea might be to select a public space closer to your residential address or even possibly take a trusted person along.
P2P provides an easy way to access cryptocurrencies yet if not done properly may pose significant risks that may lead to the loss of your asset. It is therefore important to do your own research and exercise caution when pursuing p2p. However, a more secure option for p2p is to trade with a trusted p2p exchange platform.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.