Peer-to-Peer (P2P) trading offers a new way of direct crypto exchanges between users with little or no interference from an intermediary. Typically whenever you need to buy or sell a crypto asset, you need to go through an exchange that matches your buy/sell order with an alternate order in the order book. Hence, these exchanges heavily mediate the trade, as you don’t get to communicate with the counterparty at all. The exchanges automatically organize the transaction, and it is executed based on market parameters.
However, with P2P trading, you can choose whom to trade your cryptocurrency with and negotiate a fair price with almost zero influence from any third party. However, due to lesser regulations, P2P trading could be risky, as some malicious traders are only out to find victims whom they can rip off. This article will give insights into the nuances of P2P trading in cryptocurrency and what to look for in any P2P trading platform.
What is a P2P Trading Platform?
A peer-to-peer (P2P) trading platform is anywhere two or more parties are allowed to trade with each other directly, ranging from social media groups on Telegram, Discord, and WhatsApp, to more advanced trading platforms like Centralized Exchanges. These platforms allow intending traders to directly relate and negotiate with each other with little or no effort from a third party.
How Does a Crypto P2P Trading Platform Work?
Cryptocurrency P2P trading platforms are very similar to other P2P exchange platforms where goods and services are exchanged upon an advert listing.
Some P2P services are executed on social media groups where the administrator attests to the legitimacy of both buyer and seller. In some cases, they trade using escrow accounts to facilitate trust.
However, to reduce the rigors of P2P trading on unregulated platforms, several fintech platforms have created P2P exchanges with several features that give you insight as to whether you should trust a counterparty or not. With clear metrics, crypto trading platforms let you know the level at which you can trust the counterparty.
Some of these metrics include:
- Number of years since the account has been active: the longer a person has been active on a trading platform, the more trustworthy they are – they are incentivized to act honestly so as not to lose their accounts
- Transaction count: Someone who has only completed ten transactions without being flagged for fraudulent activity is less reputable than someone who has completed a hundred. Hence, higher transaction counts offer great insights into a counterparty’s trustworthiness.
- Total transaction volume: This gives you insights into how much money they have handled while trading on the platform; again, the higher the number, the more trustworthy the counterparty is
- Success rate: This shows how many transactions have been completed and how many have failed. Generally, looking out for statistics with 90% and above is safe.
- Verification Badge: Some P2P trading platforms verify trusted merchants on their platform, who frequently buy and sell. You are a lot safer trading with those people.
Advantages of P2P Trading
- Multiple payment methods: Since P2P trading doesn’t rely on a cryptocurrency pair listed by an exchange, there is no limit to the payment methods on P2P trading platforms. For example, a coin XYZ on an exchange may only be paired with BTC and USDT, meaning that if you want to trade XYZ, you can only get BTC or USDT in return. However, in P2P trading, you can simply arrange for the most convenient payment method and negotiate a fair price for the crypto being traded. For example, on Paxful, there are nearly 400 payment methods; hence, you stand a very high chance of getting your preferred currency.
- It could be more profitable: Unlike regular spot trading on exchanges, P2P trading allows you to set your rates and negotiate for the best possible deal; regardless of market prices, you may make more profits; hence, you are not subject to an order book. As a result, some people engage in arbitrage trading by getting cheap cryptocurrency deals on one P2P platform and selling higher on another.
- It can be used to circumvent restrictions: Cryptocurrency transactions are prohibited in many countries; hence, it may be impossible to directly make a transaction using your credit card, debit card, or bank teller. However, since P2P trading is not dependent on any central authority, people living in such countries can directly engage in crypto transactions. Examples of countries with restrictive crypto laws include China, India, Nigeria, etc.
Disadvantages of P2P Trading
- Low liquidity: If you are using a not-so-common payment method, you may not quickly get a counterparty to trade with; hence, you may need to wait long to execute a simple trade. However, with spot trading on exchanges, your order is instantaneously filled.
- The need to trust: Trading on P2P platforms requires huge trust to ensure you are not ripped off. You must trust the trading platform, the counterparty buyer/seller, the escrow system (if any), etc.
- Fraud: P2P trades, especially those conducted under unregulated platforms, face the risk of scams if not careful. Hence, before engaging in any P2P transaction, follow the checklist above, and ensure that you do not fall for enticing ads with “too good to be true” offers because if the deal is too mouth-watery, it may be fishy – don’t be greedy.
- Slow trading speeds: P2P trading is generally slower than spot trading on exchanges; a trader may need some time to transfer the asset or crypto to the buyer, leading to unnecessary delays, which may affect the worth of the crypto asset’s price due to its volatile nature. However, while trading spots on exchanges, the transactions are usually instant.
How to initiate a cryptocurrency exchange via a P2P platform
After securing a platform to trade P2P, sign up and register with your KYC document (if necessary). Then, look for an ad that suits your offer, and select the best choice for you while ensuring that you verify the seller’s trustworthiness via the checklist listed earlier.
Again, avoid greediness, as ridiculously generous offers could be fraudulent.
Key features to look out for when choosing a P2P platform
- Easily navigable and user-friendly interface.
- Optimal security, e.g., two-factor authentication, end-to-end encryption.
- Well-rated by other user reviews.
- Wide currency and payment method range.
- Low transaction fees
- Active customer support
Some common P2P trading platforms include Paxful, LocalBitcoins, Binance P2P, OKEx P2P, WazirX P2P., etc.
The need for trust in P2P trading somewhat defeats the purpose of the blockchain - a trustless, decentralized network; however, due to the need to access certain privileges, P2P trading is important in cryptocurrency trading.
Like any crypto trading endeavor, it is important that you take important measures to secure yourself while engaging in P2P trading so that you won't become a victim of scammers.