TL;DR
Peer-to-peer (P2P) trading is the direct buying and selling of cryptocurrencies among users without intermediaries. P2P exchanges connect buyers and sellers and provide a layer of protection through escrow services, feedback / rating systems, and dispute resolution.
The advantages of P2P trading include global accessibility, multiple payment options, zero transaction fees, and personalized offers. However, it also has drawbacks, such as slower trading speeds and lower liquidity than centralized exchanges (CEXs).
Introduction
P2P cryptocurrency trading is a method of buying and selling cryptocurrencies directly between users without the need for a central intermediary. Users can use a P2P exchange to access a global marketplace, multiple payment options, and personalized offers. However, P2P trading also has its drawbacks, such as slower trading speeds and lower liquidity. In this article, we will discuss the pros and cons of P2P trading and how people can benefit from it.
What Is P2P Trading?
P2P crypto trading refers to the direct buying and selling of cryptocurrencies among users, without a third party or an intermediary. This is unlike buying and selling cryptocurrencies using a CEX, where you cannot transact directly with counterparties.
A CEX would use charts and market order aggregators to gauge the current market prices and determine the optimal time to buy, sell, or hold your crypto. When you are ready to buy or sell, the exchange enters your order into its order book and facilitates the transaction on your behalf.
Depending on the type of order you use, effects such as slippage may mean you don’t get the exact price you want. P2P trading, on the other hand, gives you full control over pricing, settlement time, and whom you choose to sell to and buy from.
How Does a P2P Exchange Work?
Think of a P2P exchange in the same way you might Facebook Marketplace — they are similar in that they both connect buyers and sellers. However, buying or selling something on Facebook Marketplace can be tricky as the counterparties are strangers and it’s difficult to establish trust.
What happens if the seller receives payment, then proceeds to block the buyer and not mail them the product that they purchased? In this instance, the buyer loses money due to fraud.
P2P exchanges aim to not only connect buyers and sellers, but also provide them with a layer of protection by securing transactions and reducing the risk of fraud. Buyers and sellers can browse crypto ads and post their own ads while enjoying this protection, made possible by feedback and rating systems.
In addition, the P2P exchange uses escrow to secure the crypto being bought and sold until both parties have confirmed the transaction. For example, if you are selling Bitcoin for fiat money, Binance will escrow your Bitcoin (BTC). Once you receive the fiat money, you can confirm the transaction and the BTC will be released to the buyer's wallet.
If either party is dissatisfied with the transaction, they can file an appeal to resolve the issue with the counterparty, or have Binance Customer Support step in. Do note, however, that the appeal must be filed during the order process, while the order is still pending.
Advantages of P2P Trading
Global marketplace
One advantage of using a local P2P Bitcoin exchange is that it gives you access to a global market of cryptocurrency buyers and sellers. For example, some P2P exchanges are accessible in hundreds of countries, allowing you to buy and sell cryptocurrencies with people around the world in a matter of minutes.
Multiple payment methods
Traditional exchanges may not offer as many payment options as P2P exchanges. Binance P2P, for example, offers over 700 payment methods, including in-person cash payments. This can be useful for those who prefer face-to-face transactions or those without access to a bank account.
Zero trading fees for takers
While some cryptocurrency exchanges charge a fixed fee or percentage per trade, others allow traders to connect and conduct transactions for free — be sure to check the terms and conditions before deciding on a P2P exchange.
Secure transactions via escrow
As mentioned above, some cryptocurrency exchanges use escrow services to protect both buyers and sellers. When choosing to secure a transaction with escrow, funds are held by the exchange and released only when the terms of the transaction are met by both parties.
Transactions must be completed within a certain time frame; if a buyer doesn't make the fiat payment within the specified time, their order is canceled and the cryptocurrency is returned to the seller's wallet.
Personalized offers
Sellers have complete control over the selling price, exchange rate, payment method, and how much they are willing to sell per transaction. The same is true for buyers (buying price, payment method, and how much they are willing to spend per transaction). As long as both parties’ terms align, a deal can be struck.
Disadvantages of P2P Trading
Slower trading speeds
While a P2P transaction can be conducted almost instantly once both parties have confirmed the transaction, one party might delay the transaction for various reasons. With traditional trading, you don't have to wait for the buyer or seller to confirm the transaction before you can move on.
Low liquidity
P2P exchanges naturally have lower liquidity than CEXs due to the nature of the process. For this reason, larger traders who need to complete major transactions may prefer to use over-the-counter (OTC) trades, or buy / sell via the standard exchange.
How Do People Benefit from Trading P2P?
P2P trading is a convenient way to invest in cryptocurrency. Not only does it allow you to buy or sell cryptocurrency directly with others, it also lets you avoid some of the transaction fees associated with traditional exchanges. Here are three ways in which people use P2P trading to their advantage:
Arbitrage with fiat
P2P trading provides arbitrage opportunities with fiat money. With over 100 fiat currencies to choose from on Binance, for instance, you have the opportunity to benefit from the price differences between these fiat currencies.
Arbitrageurs start by calculating the price differences and potential profits before making any purchase. Below is an example of how an arbitrageur can leverage price differences.
Trading BTC/USD: If the buy price is $21,000 or €23,100 (the USD and EUR markets have different prices) and the sell price is $20,800 or €22,880, buying Bitcoin and immediately selling it back in USD would lead to a loss of $200 or €220 (sell price - buy price).
Trading BTC/EUR: If the buy price is $21,364 or €23,500 and the sell price is $21,182 or €23,300, purchasing Bitcoin with USD and selling it for EUR would lead to a profit of $182 or €200.
The above example shows how buying BTC on the US market and selling it for EUR can be more advantageous than buying and selling only on the domestic market.
Arbitrage between different exchanges
P2P trading provides plenty of opportunities for arbitrageurs, because there are often significant price differences between exchanges. Many people use P2P trading to buy and sell crypto assets in order to benefit from these differences.
They may arbitrage between different exchanges, usually through the purchase and sale of the same asset to take advantage of its price difference on different exchanges.
For example, if Bitcoin sells for $21,000 on exchange A and $21,100 on exchange B, buying it on A and immediately selling it on B would result in the buyer earning $100 per Bitcoin.
Publish buy and sell ads
This method allows you to post an ad on a P2P trading platform, featuring the asset you are interested in buying or selling and the price at which you’re willing to transact. Once your ad is posted, other platform users who see it will then decide if they want to trade with you.
If another P2P user decides to trade with you, he will send you a trade request. Once you accept the request, both parties can complete the trade. Choosing to set a higher price than the market price will ensure that you generate more revenue.
For example, you can publish an advertisement to purchase Bitcoin at $20,000 and another advertisement to sell Bitcoin at $20,200. This way, you can earn $200 for every 1 Bitcoin that you transact.
What Are the Risks of Arbitrage?
While arbitrage can be beneficial to a trader, it comes with its own risks and costs. For instance, shifts in exchange rates may drive the value of a currency or asset down. In this case, a trader may experience financial loss if their asset's value decreases before they manage to sell it on another market.
In addition, there are banking fees associated with transferring assets between markets, which can eat into profits. There may also be other indirect costs, such as the cost of financing transactions and the opportunity cost of not investing funds elsewhere.
Is P2P Trading Safe?
P2P trading is generally safe but this usually also depends on the exchange and the safety measures it has in place. While older P2P exchanges came with higher risk of theft and scams, many newer P2P trading platforms have greatly improved their security measures.
A leading P2P exchange today will have an escrow service, regular security updates, and a stringent identity verification process (among other measures) to keep users safe. However, even with robust safeguards in place, all trading activity comes with risks — and P2P trading is no exception.
Closing Thoughts
P2P cryptocurrency trading is a way to buy and sell cryptocurrencies without involving intermediaries. With P2P trading, you control the prices, counterparties, and timing of your transactions. It can be likened to Facebook Marketplace but with an added layer of security through feedback systems, ratings, and escrow services.
This global marketplace provides access to a variety of payment options, including in-person cash transactions. While P2P transactions can be slower and less liquid than those on CEXs, those willing to wait and who want personalization in their trades can benefit from the arbitrage and other opportunities P2P trading offers.
Further Reading
Disclaimer and Risk Warning: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial advice, nor is it intended to recommend the purchase of any specific product or service. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. Not financial advice.
