TL;DR
Peer-to-peer (P2P) trading is the direct buying and selling of cryptocurrencies between users, without intermediaries. P2P brokers 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, many payment options, no transaction fees, and personalized offers. However, there are also disadvantages such as slower trading and lower liquidity compared to centralized exchanges (CEXs).
Introduction
P2P crypto trading is a method of buying and selling cryptocurrencies directly between users, without the need for an intermediary. Users use a P2P broker to access a global marketplace that offers multiple payment options and personalized offers. However, P2P trading also has its disadvantages, such as slower trading and lower liquidity. In this article, we will discuss the pros and cons of P2P trading and see how people can benefit from this activity.
What is P2P trading?
Crypto P2P trading refers to the direct buying and selling of cryptocurrencies between users, without third parties or intermediaries. It is a process that differs from buying or selling cryptocurrencies through a CEX, where you cannot trade directly with counterparties.
A CEX uses charts and systems that aggregate market orders to evaluate current market prices and determine the ideal time to buy, sell or hold your cryptocurrencies. When you decide to buy or sell, the broker enters your order into an order book and facilitates the transaction for you.
Depending on the type of order you use, effects such as slippage may mean that you are unable to execute your order at the desired price. P2P trading, on the other hand, offers full control over prices and settlement times. Furthermore, you choose the counterparty you want to trade with.
How does a P2P broker work?
The concept of a P2P brokerage is similar to that of Facebook Marketplace — both platforms connect buyers and sellers. However, buying or selling something on Facebook Marketplace can be complicated, because when counterparties don't know each other, it's difficult to establish a degree of trust.
What happens if the seller receives payment, blocks the buyer and does not ship the product they sold? In this case, the buyer loses his money due to fraud.
P2P brokers aim to not only connect buyers and sellers, but also provide a layer of protection, securing transactions and reducing the risk of fraud. Buyers and sellers can browse crypto listings and post their own ads while enjoying this protection, enhanced by user feedback and rating systems.
Furthermore, to protect the traded cryptocurrencies, the P2P broker maintains custody of them until both parties confirm the transaction. For example, if you are selling Bitcoin for fiat currencies, Binance will take temporary custody of your Bitcoin (BTC). After receiving the money (fiat currency), you must confirm the transaction and the BTC will be released to the buyer's wallet.
If either party is dissatisfied with the transaction, they can request an appeal to resolve the issue with the counterparty or request intervention from Binance Customer Support. Please note, however, that the resource request must be submitted during the order execution process, while the order is still pending.
Advantages of P2P trading
Global market
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 trade cryptocurrencies with people around the world in a matter of minutes.
Various payment methods
Traditional brokers may not offer as many payment options as P2P brokers. Binance P2P, for example, offers over 700 payment methods, including in-person cash payments. This can be useful for those who prefer in-person transactions or people who don't have access to a bank account.
Zero trading fees for takers
While some cryptocurrency brokers charge a flat fee or percentage per trade, others allow traders to connect and transact for free. — check the terms and conditions before choosing a P2P broker.
Secure transactions via escrow service
As mentioned above, some cryptocurrency exchanges use escrow services to protect buyers and sellers. With the guarantee of a custodial transaction, funds are held by the broker and released only when the terms of the transaction are met by both parties.
Transactions must be completed within a specific time frame; If a buyer does not complete payment within the deadline, their order will be canceled and the cryptocurrencies will be returned to the seller's wallet.
Personalized offers
Sellers have full control over the sales price, quotation, payment method and the amount they are willing to sell per transaction. The same goes for buyers (purchase price, payment method and how much they are willing to spend per transaction). It is enough that the terms of both parties are aligned for a negotiation to be concluded.
Disadvantages of P2P trading
Slow trading
Although a P2P transaction can be carried out almost instantly when both parties confirm the transaction, it may occur that one party delays the completion of the transaction for various reasons. In traditional trading operations, you do not need to wait for the buyer or seller to confirm the transaction to proceed.
Low liquidity
Due to the nature of the process, P2P brokers naturally have less liquidity than CEXs. For this reason, traders of larger amounts who need to complete important transactions often prefer to use the over-the-counter (OTC) market or buy/sell through the standard broker.
How do people benefit from P2P trading?
P2P trading is a convenient way to invest in cryptocurrencies. Not only does it allow you to trade cryptocurrencies directly with others, but it also avoids some of the transaction fees associated with traditional exchanges. Below, we list three ways to use P2P trading to your advantage:
Arbitration with fiat currency
P2P trading offers arbitrage opportunities with fiat currencies. With over 100 fiat currencies available on Binance, for example, you can benefit from the price differences between these fiat currencies.
Before making any purchases, arbitrage traders calculate price differences and potential profits. Below is an example of how they can take advantage of price differences.
BTC/USD Trading: 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, buy bitcoin and sell it immediately back to USD or EUR would lead to a loss of $200 or €220 (selling price - buying price).
BTC/EUR Trading: If the buy price is $21,364 or €23,500 and the sell price is $21,182 or €23,300, buying bitcoin with USD and selling it for EUR would provide a profit of $182 or €200.
The example above shows how buying BTC in the American market and selling it for EUR can be more advantageous than buying and selling in the same domestic market.
Arbitration between different brokers
P2P trading offers many arbitrage opportunities, as there are often significant price differences between brokers. Many people use P2P trading to buy and sell crypto assets and make profits from these differences.
They can arbitrate between different brokers, generally buying and selling the same asset to take advantage of the price difference.
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 a profit of $100 per bitcoin.
Publication of purchase and sale advertisements
With this method, you can publish an advertisement on a P2P trading platform, presenting the asset you are interested in buying or selling and the price at which you are willing to trade. After publication, your ad will be visible for other users of the platform to potentially negotiate with you.
If another P2P user decides to trade with you, they will send you a trade request. After accepting the request, both parties can complete the negotiation. Choosing to set a price higher than the market price will ensure that you generate more revenue.
For example, you might run 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 you trade.
What are the risks of arbitration?
Although arbitrage offers benefits to the trader, it has its own risks and costs. For example, changes in exchange rates can reduce the value of a currency or asset. In this case, the trader may suffer financial losses if the value of his asset decreases before he is able to sell it on another market.
Additionally, there are fees associated with transferring assets between markets, which can hurt 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 depends on the broker and the security measures they offer. Some older P2P brokers are at greater risk of theft and scams, but many newer P2P trading platforms have greatly improved their security measures.
A good P2P exchange today must offer custodial services, regular security updates, and a rigorous identity verification process (among other measures) to keep users safe. However, even with robust protections in place, all trading activity presents risks — and P2P trading is no exception.
Final considerations
P2P trading offers a way to buy and sell cryptocurrencies without involving intermediaries. With P2P trading, you have control over prices, the timing of your transactions and choose your counterparties. It is an activity that can be compared to Facebook Marketplace, but with an additional layer of security through feedback systems, reviews and escrow services.
This global marketplace provides access to a variety of payment options, including in-person cash trades. Although some P2P transactions may be slower and less liquid than on CEXs, users willing to wait and who want customization in their trades can benefit from arbitrage and other opportunities that P2P trading offers.
Further reading
Guide on Peer-to-Peer Networks
How Blockchain Technology will impact the Banking Sector
What is Blockchain Technology? Definitive Guide
What is Leverage in Cryptocurrency Trading?
The 6 best Dual Investment strategies
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