Summary
Peer-to-peer (P2P) trading is buying and selling cryptocurrency directly between users without intermediaries. P2P exchanges connect buyers and sellers, and provide layers of protection through escrow services, feedback/rating systems, and dispute resolution.
The advantages of P2P trading include global accessibility, numerous payment options, zero transaction fees, and personalized offers. However, there are also disadvantages, such as lower trading speed and liquidity than centralized exchanges (CEX).
Introduction
P2P cryptocurrency trading is a method of buying and selling cryptocurrency directly between users without the need for a central intermediary. Users can use P2P exchanges to access a global marketplace, a number of payment options, and personalized offers. However, P2P trading also has disadvantages, such as lower trading speed and liquidity. In this article, we will discuss the pros and cons of P2P trading and ways to take advantage of it.
What Is P2P Trading?
P2P crypto trading is a method of buying and selling cryptocurrencies directly between users without third parties or intermediaries. This method is different from buying and selling cryptocurrencies using CEX which does not allow you to transact directly with counterparties.
CEX will use charts and market order aggregators to measure 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 will enter your order into its order book and facilitate the transaction on your behalf.
Depending on the type of order used, effects such as slippage may cause you not to get the desired price. On the other hand, P2P trading provides complete control over pricing, settlement times, and counterparties for selling and buying.
How Do P2P Exchanges Work?
P2P exchanges are similar to Facebook Marketplace — they both connect buyers and sellers. However, buying or selling something on Facebook Marketplace can be complicated because counterparties are strangers and it's difficult to build trust.
What if the seller receives payment, then blocks the buyer and does not send the product he purchased? In this example, the buyer lost money due to fraud.
In addition to connecting buyers and sellers, P2P exchanges also aim to provide 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 a feedback and rating system.
Additionally, P2P exchanges use escrow to secure bought and sold crypto until both parties confirm the transaction. For example, if you sell Bitcoin for fiat, Binance will place an escrow on your Bitcoin (BTC). Once you receive the fiat money, you can confirm the transaction, and then the BTC will be released to the buyer's wallet.
If either party is not satisfied with the transaction, he or she can submit an appeal to resolve the issue with the counterparty or seek assistance from Binance Customer Support. However, please note that the appeal must be submitted during the order process, i.e. while the order is still pending.
Advantages of P2P Trading
Marketplace global
One of the advantages of using a local P2P Bitcoin exchange is access to a global market of cryptocurrency buyers and sellers. For example, a number of P2P exchanges are accessible in hundreds of countries, allowing you to buy and sell cryptocurrencies with people all over the world in just minutes.
A number of payment methods
Traditional exchanges may not offer as many payment options as P2P exchanges. For example, Binance P2P offers more than 700 payment methods, including direct cash payments. This is beneficial for users who prefer face-to-face transactions or users who do not have access to a bank account.
Zero trading fees for takers
While some cryptocurrency exchanges charge a flat or percentage fee per trade, others allow traders to connect and make transactions for free — make sure you check the terms and conditions before choosing a P2P exchange.
Secure transactions via escrow
As mentioned, a number of cryptocurrency exchanges use escrow services to protect buyers and sellers. When choosing to secure a transaction with escrow, funds are held by the exchange and will only be released when the terms of the transaction are met by both parties.
Transactions must be completed within a certain time period. If the buyer does not make the fiat payment within the specified time, the order will be canceled and the cryptocurrency will be returned to the seller's wallet.
Personalized offers
Sellers have full control over selling prices, exchange rates, payment methods, and desired sales size per transaction. Likewise with buyers (purchase price, payment method, and desired spending amount per transaction). As long as both parties' terms are aligned, an agreement can be reached.
Disadvantages of P2P Trading
Lower trading speed
Although P2P transactions can be carried out almost instantly after both parties confirm the transaction, one of the parties may delay the transaction for various reasons. In traditional trading, you don't have to wait for the buyer or seller to confirm the transaction before you can proceed.
Low liquidity
P2P exchanges obviously have lower liquidity than CEXs due to the characteristics of their processes. Therefore, large traders who need to complete large transactions may prefer to use over-the-counter (OTC) trading or buy/sell via standard exchanges.
How to Take Advantage of P2P Trading?
P2P trading is an easy way to invest in cryptocurrency. In addition to allowing you to buy or sell cryptocurrency directly with other people, P2P trading also allows you to avoid some of the transaction fees associated with traditional exchanges. Here are three ways people use P2P trading to their advantage:
Arbitrage by fiat
P2P trading provides arbitrage opportunities with fiat money. For example, with a choice of over 100 fiat currencies on Binance, you have the opportunity to profit from price differences between them.
Arbitrageurs start by calculating price differences and profit potential before making a purchase. The following is an example of how arbitrageurs exploit price differences.
Trading BTC/USD: If the buy price is $21,000 or €23,100 (USD and EUR markets have different prices) and the sell price is $20,800 or €22,880, buying Bitcoin and immediately reselling it for USD would result in a loss of $200 or €220 ( selling price - purchase price).
Trading BTC/EUR: If the buy price was $21,364 or €23,500 and the sell price was $21,182 or €23,300, buying Bitcoin for USD and selling it for EUR would result in a profit of $182 or €200.
The example above shows that buying BTC on the US market and selling it for EUR will be more profitable than buying and selling it only on the domestic market.
Arbitrage between different exchanges
P2P trading provides a number of opportunities for arbitrageurs as there are often significant price differences between exchanges. Most people use P2P trading to buy and sell crypto assets to take advantage of the difference.
They can arbitrage between different exchanges usually through buying and selling the same asset to take advantage of its price differences on various exchanges.
For example, if Bitcoin is selling for $21,000 on exchange A and $21,100 on exchange B, then buying it on A and immediately selling it on B will make the buyer $100 per Bitcoin.
Publish buy and sell ads
This method allows you to post an ad on a P2P trading platform displaying the asset you wish to buy or sell along with the desired price for the transaction. Once an ad is posted, other platform users who see it then decide whether 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 prices higher than market prices will ensure that you generate higher revenues.
For example, you could publish an ad to buy Bitcoin for $20,000 and another ad to sell Bitcoin for $20,200. This way, you can earn $200 for every 1 Bitcoin transacted.
What Are the Risks of Arbitrage?
Although it can be profitable for traders, arbitrage has its own risks and costs. For example, a shift in exchange rates can reduce the value of a currency or asset. In this situation, the trader may experience financial losses if the value of the asset falls before he manages to sell it in another market.
Additionally, there are banking fees associated with transferring assets between markets that can reduce profits. There are also other indirect costs, such as the cost of funding the transaction and the opportunity cost of not investing funds elsewhere.
Is P2P Trading Safe?
P2P trading is generally safe, but this usually depends on the exchange and the security measures implemented. While older P2P exchanges have a higher risk of theft and fraud, most newer P2P trading platforms have much better security measures.
Today's leading P2P exchanges will have escrow services, regular security updates, and strict identity verification processes (aside from other measures) to keep users safe. However, all trading activities carry risks even if they have strong protection. P2P trading is no exception.
Closing
P2P cryptocurrency trading is a way to buy and sell cryptocurrencies without involving intermediaries. With P2P trading, you control the price, counterparty, and transaction execution time. These exchanges are similar to Facebook Marketplace, but with added layers of security through feedback systems, ratings, and escrow services.
This global marketplace provides access to a number of payment options, including direct cash transactions. Although P2P transactions can be slower and less liquid than on CEX, users who are willing to wait and want personalization in their trading can take advantage of arbitrage and other opportunities offered by P2P trading.
Further Reading
Explanation of Peer-to-Peer Networks
How Blockchain Technology Will Change the Banking Industry
What is Blockchain Technology? An Essential Guide
What Is Leverage in Crypto Trading?
6 Best Multiple Investment Trading Strategies
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. This content should not be considered financial advice nor is it intended to suggest the purchase of any particular product or service. Digital asset prices can be volatile. The value of your investment may fall or rise. You may not get back the amount invested. You are fully responsible for your investment decisions. Binance Academy is not responsible for any losses you may experience. Not financial advice.