Brief content
Peer-to-peer (P2P) trading is the direct buying and selling of cryptocurrencies between users without intermediaries. P2P exchanges connect buyers and sellers and provide a level of protection through escrow services, feedback/rating systems, and dispute resolution.
The advantages of P2P trading are global availability, various payment options, no transaction fees and personalized offers. However, this trading also has 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 the global market, various payment options and personalized offers. However, P2P trading also has its drawbacks, such as lower trading speed and 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 cryptocurrency trading means direct buying and selling of cryptocurrency by users without third parties or intermediaries. It differs from buying and selling cryptocurrency on CEX, where you cannot directly enter into agreements with counterparties.
CEX uses charts and market order aggregators to assess current market prices and determine the optimal time to buy, sell or hold your cryptocurrency. When you are ready to buy or sell, the exchange enters your order into its order book and executes the order on your behalf.
Depending on the type of order you use, effects such as slippage may result in you not getting exactly the price you want. P2P trading, on the other hand, gives you full control over pricing, settlement times, and the user you want to trade with.
How does a P2P exchange work?
P2P exchanges are similar to Facebook Marketplace in that they connect buyers and sellers. However, buying or selling something on Facebook Marketplace can be challenging because the counterparties are unfamiliar and it is difficult to establish trust.
What happens if the seller receives the payment and then blocks the buyer and does not send the purchased item by mail? In this case, the buyer loses money due to fraud.
P2P exchanges aim not only to connect buyers and sellers, but also to provide them with a level of protection, ensuring the security of transactions and reducing the risk of fraud. Buyers and sellers can view cryptocurrency ads and post their own ads with this protection made possible by feedback and rating systems.
In addition, the P2P exchange uses escrow to protect the cryptocurrency being bought and sold until both parties confirm the transaction. For example, if you sell Bitcoin for fiat money, Binance will hold your Bitcoin (BTC). Once you receive the fiat money, you can confirm the transaction and the BTC will be transferred to the buyer's wallet.
If one of the parties is dissatisfied with the transaction, they can file an appeal to resolve the issue with the counterparty or contact Binance Customer Support. However, please note that the appeal must be filed within the validity period of the warrant.
Advantages of P2P trading
Global marketplace
One of the benefits of using a local P2P exchange is that it gives you access to a global marketplace of cryptocurrency buyers and sellers. For example, some P2P exchanges are available in hundreds of countries, allowing you to buy and sell cryptocurrencies to people around the world in minutes.
A large number of payment methods
Traditional exchanges may not offer as many payment methods as P2P exchanges. For example, Binance P2P offers more than 700 payment methods, including cash payments. This payment method can be useful for those who prefer face-to-face transactions or those who do not have access to a bank account.
No trading commission for takers
Some cryptocurrency exchanges charge a fixed fee or percentage per trade, while others allow traders to connect and trade for free. Be sure to read the terms and conditions before deciding to choose a P2P exchange.
Secure transactions through escrow
As mentioned above, some cryptocurrency exchanges use escrow services to protect buyers and sellers. If you choose to protect the deal with escrow, the funds are held by the exchange and transferred only when the terms of the deal are met by both parties.
Transactions must be completed within a certain period. If the buyer does not make a fiat payment within the specified time, his 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 the number of assets they are willing to sell per transaction. The same applies to buyers (purchase price, payment method and amount of assets they are willing to spend per transaction). If the conditions for both parties match, the deal can be concluded.
Disadvantages of P2P trading
Lower trading speed
Once both parties confirm the execution of the agreement, a P2P transaction can be made almost instantly. However, one of the parties may delay the transaction for various reasons. With traditional trading, you don't need to wait for the transaction to be confirmed by the buyer or seller.
Low liquidity
P2P exchanges, of course, have lower liquidity than CEX due to the nature of the trading process. Therefore, large traders who need to execute large trades may prefer to use over-the-counter (OTC) trades or buy/sell through a standard exchange.
How do people benefit from P2P trading?
P2P trading is a convenient way to invest in cryptocurrency. Not only does it allow you to buy or sell cryptocurrency directly with other users, but it also allows you to avoid some of the transaction fees associated with traditional exchanges. There are three ways to make money from P2P trading:
Arbitration by fiat
P2P trading provides arbitrage opportunities with fiat money. For example, there are over 100 fiat currencies available on Binance and you have the opportunity to profit from the price difference between these fiat currencies.
Arbitrage traders start by calculating the price difference and potential profit before making any purchases. Below is an example of how an arbitrage trader can use a price difference.
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, buying Bitcoin and instantly selling back to the same fiat will result in loss of $200 or €220 (sale price - purchase 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 for USD and selling for EUR will generate a profit of $182 or €200.
The above example shows how buying BTC in the US market and selling in EUR can be more profitable than buying and selling only in the domestic market.
Arbitration between different exchanges
P2P trading offers many opportunities for arbitrage traders because there is often a significant price difference between exchanges. Many people use P2P trading to buy and sell cryptoassets to profit from this difference.
They can arbitrage between different exchanges, usually by buying and selling the same asset to take advantage of price differences on different exchanges.
For example, if Bitcoin is selling for $21,000 on Exchange A and $21,100 on Exchange B, buying it on Exchange A and immediately selling it on Exchange B will earn you $100 per 1 Bitcoin.
Publication of a buy and sell ad
This method allows you to place an ad on a P2P trading platform indicating the asset you are interested in buying or selling and the price at which you are willing to trade. Once your ad is published, other platform users who see it will decide if they want to trade with you.
If another P2P user decides to trade with you, they will send you a trade request. Once you accept the request, both parties can complete the transaction. Choosing a higher price than the market price ensures that you will receive more income.
For example, you can post 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 of trading volume.
What are the risks of arbitration?
Although arbitrage can be beneficial to the trader, it comes with its own risks and costs. For example, changes in exchange rates can cause a currency or asset to decline in value. In this case, the trader may suffer financial losses if the value of his asset falls before he can sell it in another market.
In addition, there are bank 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 the funds elsewhere.
Is P2P trading safe?
P2P trading is generally safe, but it also usually depends on the exchange and the security measures it takes. Older P2P exchanges were associated with a higher risk of theft and fraud, but many newer P2P trading platforms have greatly improved their security measures.
Today's leading P2P exchange will have an escrow service, regular security updates, and a strict identity verification process (among other measures) to keep users safe. However, even with robust security measures in place, any trading activity involves risks, and P2P trading is no exception.
Results
P2P cryptocurrency trading is a way to buy and sell cryptocurrencies without the involvement of intermediaries. With P2P trading, you control the prices, counterparties and timing of your transactions. It can be compared to Facebook Marketplace, but with an additional level of security due to feedback systems, ratings and escrow services.
This global marketplace provides access to various payment options, including cash payments. While P2P transactions can be slower and less liquid than CEX transactions, those willing to wait and want to personalize their transactions can take advantage of the arbitrage and other opportunities that P2P trading offers.
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Disclaimer and Risk Warning: This content is provided to you "as is" for general information and educational purposes only, without any representations or warranties. It should not be considered as financial advice and is not intended to recommend the purchase of a particular product or service. Digital asset prices can be volatile. The value of your investment may fall as well as rise, and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not responsible for any losses you may incur. This is not financial advice.
