In brief
Peer-to-peer (P2P) trading is becoming increasingly popular among cryptocurrency traders, but like any type of trading, it comes with potential risks. Being aware of these risks allows traders to protect themselves from potential losses and better understand the process. There are many precautions users can take — read on to learn what they are, and how and when to apply them.
Introduce
Peer-to-peer (P2P) cryptocurrency trading is the practice of buying and selling digital currencies without the need for a third party. P2P trading allows buyers and sellers to set prices, choose partners, and decide when to trade. It also allows diligent and experienced traders to find and take advantage of favorable trading conditions that suit their needs.
P2P cryptocurrency markets facilitate the direct exchange of cryptocurrencies between individual users. There is no central authority or third-party intermediary, so P2P trading gives users more control over their funds and allows them to protect their identity during transactions.
Despite these benefits, there are also risks associated with P2P trading that users should be acutely aware of before trying this feature. Common risks that traders face are fake proof of payment, chargeback fraud, false transfers, man-in-the-middle attacks, fraud triangulation, and spoofing.
Is P2P trading safe?
As with any type of trading, P2P trading has its fair share of risks, which vary depending on the exchange and its safety measures. While older exchanges face higher risks of theft and fraud, many newer P2P trading platforms have significantly improved their security measures.
For example, a top P2P exchange today typically has an escrow service, regular security updates, and strict identity verification processes (and other measures) to keep users safe.
However, even with appropriate protections in place, all trading activities involve risk — and P2P trading is no exception.
What are some common P2P scams?
Proof of payment or fake SMS
Scammers can digitally alter receipts to convince you that they sent payment and trick you into unlocking the cryptocurrency for them. One example is SMS phishing, in which criminals spoof a text message to notify victims that they have received a payment.
How to avoid this scam: As a seller, you should only unlock the transaction after checking that the payment is already in your wallet or bank account.
Chargeback fraud
Bad actors can use chargebacks on payment platforms to reverse their payments upon receiving your assets. In many cases, they try to pay through a third-party account. Some payment methods such as checks and online wallets allow for easier chargebacks.
How to avoid this scam: Don't accept payments from third-party accounts. If that happens, file a claim against the platform and initiate a refund to the buyer's account.
Wrong transport
As with chargeback fraud, a fraudster may try to steal your assets by contacting their bank to report an erroneous transaction and request that it be reversed. Some scammers may even pressure you not to report the incident by using scare tactics, such as warning you that selling cryptocurrency is illegal.
How to avoid this scam: Don't be intimidated by scare tactics. Systematically collect evidence, such as screenshots, of your correspondence and dealings with these criminals.
Man-in-the-middle attacks
In a man-in-the-middle attack, a bad actor gets between a user and another application, organization, or individual and communicates on behalf of that partner to steal assets or sensitive information such as private keys. The three main types of man-in-the-middle attacks include romance scams, investment solicitations, and e-commerce shopping.
Romance scam. In this situation, the scammer pretends to create an online relationship with their victim. Once they have gained the victim's trust, they will entice them to help them solve their financial problems with some money or cryptocurrency, or share sensitive information such as private keys. Finally, they will cut off all contact with the victim once they have achieved their evil goal.
Investment fraud. Investment fraud involves criminals approaching and successfully convincing victims to invest in a certain business. As a "middleman" between victims and investment opportunities, scammers can transfer users' money to wherever they want under the guise of "investing" for them.
E-commerce fraud. E-commerce scams require a scammer posing as an online seller offering desired items at discounted prices. The scammers insist that their victims need to make cryptocurrency payments to their wallets, and once this is done, they will disappear without delivering the products they promised.
How to avoid this scam: Do not respond to trading requests on any social media platform. Limit communication with your counterparty to the official platform before and during trading.
Triangle scam
Triangular fraud involves two bad actors accepting two orders from the same seller almost simultaneously, ultimately confusing the seller and releasing more cryptocurrency than they were paid.
For example, Buyer A receives a cryptocurrency order worth 5,000 BUSD (Order A), while Buyer B receives an order worth the equivalent of 6,000 BUSD (Order B).
Buyer B then transfers 5,000 BUSD to the seller, while Buyer A marks Order A as paid. The seller then releases the cryptocurrency to Buyer A, thus completing Order A for 5,000 BUSD. Buyer B sends another 1,000 BUSD to the seller, provides proof of payment for the 5,000 BUSD they received from Buyer A plus 1,000 BUSD, and forces the seller to release the digital assets according to Order B.
When the dust settled, it turned out that the seller had issued 5,000 + 6,000 = 11,000 BUSD worth of cryptocurrency but was only paid 6,000 BUSD.
How to avoid this scam: Always make sure to check your bank account or wallet to confirm that you have received full payments for all pending P2P transactions.
Phishing
Spoofing is a type of malicious attack in which scammers use fake profiles to trick users into sending them assets or information. For example, a bad actor could impersonate a P2P platform's customer service representative to gain access to personal information or cryptocurrency accounts.
How to avoid this scam: Some scammers may send fake security alerts about your account via email or text message. When checking messages, do not click on unknown links before you verify the source. You should also only seek help from official P2P exchanges.
How to identify risks
Before trading
Check P2P advertising profile. Screen potential trading candidates before you enter into a trade with any of them. Some things to keep in mind when viewing P2P profiles are:
Number of transactions: Low number is not necessarily bad, but a high number of completed transactions can be a sign of a trustworthy P2P party.
Completion rate: Reconsider if this rate is below 80% as this may indicate that the trader has a habit of backing out of trades.
Seller or User Feedback: Few positive reviews or many negative reviews may indicate a higher transaction risk.
Examine the ad carefully. Evaluate each P2P ad to determine if it meets your needs and goals. Review prices, quantities, accepted payment methods, restrictions (such as transaction limits), and other terms and conditions. For example, too large a difference between P2P prices and market prices on other trading platforms is suspicious.
When trading
Always be wary when interacting with P2P buyers. Danger signs include:
The buyer urges you to unlock the cryptocurrency.
Buyers ask for unnecessary information.
Buyer did not respond.
The buyer requests a loan from you.
The buyer pays less than the amount agreed upon in the order.
The buyer pays more than the agreed amount in the order.
Buyers require communication outside the P2P platform.
The buyer requests payment through a third party.
Always be vigilant when interacting with P2P sellers. Danger signs include:
The seller asks you to cancel the order after you have paid.
Merchants require communication outside the P2P platform.
The seller asks you to trade outside the P2P platform.
The seller asks you to pay additional commission.
After the transaction
When interacting with P2P buyers, red flags include:
The buyer has not received the property you paid for.
Check from buyer bounced.
Your bank account is blocked after receiving payment from the buyer.
The buyer initiates a chargeback through their bank after you have transferred your crypto to them.
General tips to protect yourself from scams
Trade on reputable platforms
Choose top P2P platforms that provide users with strong safety features. Popular features include:
Risk management features. A platform that enforces specific requirements before buying or selling can help reduce inactive, unreliable, or low-quality ads. Better yet, there should be a sophisticated order matching logic to match users with trusted traders and only verified sellers, as well as risk management algorithms to monitor suspicious activity .
Some algorithms are even optimized to limit the trading activity of potential bad actors. Additionally, limiting withdrawals or delays can help protect users' funds.
Know your customer (KYC) protocols. P2P platforms with KYC protocols can help beginners find trustworthy trading partners by enforcing user identity verification. This allows beginners to make trades with verified traders who have a track record and a reliable source of funds.
Escrow service. Escrow services provide a secure way for buyers and sellers to exchange goods or assets. A trusted third party — typically a P2P platform — handles the exchange of funds between transacting parties to ensure safe and fair transactions.
Customer support. Although P2P transactions typically operate without a middleman, the P2P platform's customer support team can still intervene if users have problems with the transaction.
Automatic payments. New automated payment methods allow P2P platforms to automatically process the unlocking of cryptocurrencies held in escrow without the need for manual intervention. Buyers can receive their newly purchased assets instantly, and sellers do not need to check each order payment or manually unlock assets.
Blocking feature. The blocking feature allows you to block suspicious users — if you have an unpleasant experience with someone, you can block that user and prevent them from doing business with you again.
Communicate only on the platform
Avoid contacting potential trading partners on suspicious websites and be wary of prices that sound too good to be true. Additionally, communicating using external channels makes it easier for scammers to falsely dispute you and deny the transaction ever occurred.
Double check your transactions
Remember to verify all information from your counterparty when trading peer-to-peer. Thoroughly review all receipts and transactions to ensure that nothing has been digitally altered. Here are some tips for identifying fake proof of payment:
Overlapping text
Different colors
Different font styles
Size difference
You can also use a free online image forensics tool. Search for “fake image detector” or “altered image forensics tool” to use these tools.
Take screenshots
Keep records of all evidence of communications and transactions in case you need to file an appeal.
Have targeted advertising
If you have an established cryptocurrency network, make sure your ads only reach the people you want to transact with. Hide your ad and only share it with specific people — these can be people you already know and trust, or users you've dealt with successfully in the past. Hiding ads can also be useful if you want to make a large transaction.
Block suspicious parties
Proactively block users with whom you have suboptimal transactions to protect you from fraud or other behavior that can disrupt your trading experience.
Complain
If you have problems, seek out customer support and file a complaint. Remember to provide all evidence related to your transaction so that customer support can better assist you.
summary
To protect your assets, it is essential to stay alert to the potential risks associated with P2P trading. This includes understanding the terms and conditions of any agreement, being alert to red flags, and using platforms with strong safety features.
Please exercise caution when engaging in any P2P transactions and contact customer support if you have any concerns. By paying attention and taking the necessary precautions, you can enjoy the full benefits of P2P transactions.
Read more:
What Is P2P Trading And How Do People Use It?
Peer-to-peer (P2P) networks explained | Binance Academy
Why and how to do your own research (DYOR) when investing in cryptocurrency
Five Risk Management Strategies
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