“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
That is the opening statement in the abstract section at the beginning of the Bitcoin whitepaper. Bitcoin was designed to eliminate the need for a 3rd party to facilitate transactions. However, through the evolution of the process of buying, selling, and trading cryptocurrency, many are still relying on a third party that they must give power and trust to in order to facilitate transactions.
Most cryptocurrency today involves a centralized exchange. When you buy or sell on a centralized exchange, you do not transact directly with the counterparty. The exchange sets up a system of market makers to provide liquidity so that trading can occur as price markets fluctuate. The market price determines what your buy or sell order is executed at.
Even current decentralized exchanges limit your ability to transact peer to peer as those who provide liquidity by providing both sides of a trading pair essentially allow their funds to be utilized in an automated market maker strategy (AMM). Another way to buy and sell cryptocurrency that was popular in the early Bitcoin days and is reemerging, especially in countries where there is not adequate access to online markets and exchanges is called peer to peer trading. As mentioned in the Bitcoin whitepaper by Satoshi Nakamoto, Bitcoin is designed to be a peer to peer system from one party to another without any intermediary needed. Peer to peer trading is a manifestation of that statement.
Peer to peer trading is the ability to buy and sell cryptocurrency directly between two parties, without the need of a third party intermediary. This process gives you more control over who you buy or sell your cryptocurrency to, and also the price and terms of the trade, such as what currency will be accepted by the seller in exchange for the cryptocurrency.
Benefits of Peer to Peer trading include the ability to decide who you do business with and also to choose which payment method you will accept if you are selling crypto, which can include cash in person, bank wire, or even other cryptocurrencies. You can also choose to pay or accept payment through multiple payment methods. The seller determines and has the freedom to decide how they want to be paid. Another benefit is that there are zero transaction fees on peer to peer trading.
The only fees paid are the network transfer fees native to whatever blockchain you are sending the cryptocurrency. Sellers have the option to set their preferred price at which they want to sell which does not necessarily have to match the market trading price at that time. Competition and other offers will determine how attractive your offer is. Also, for many who live in areas where gaining access to bank accounts or credentials to transact on traditional exchanges, peer to peer trading requires no identity verification or KYC procedures which can be a barrier for many people across the world.
It is important to also understand the drawbacks to a peer to peer trading system. Many feel the benefits far outweigh the drawbacks, but that depends on each person’s goals and their current circumstances. In a peer to peer trading setup, there is no third party to shoulder some of the risk that can occur. There are systems and programs developing to prevent this, to ensure that each party acts in good faith to complete the trade but each party must rely on the other to do their part of the agreement and the trade.
Longer trade times can also be an issue with peer to peer trading since traditional exchange trading can be instant if you accept the current market price. Also, there is much lower liquidity in peer to peer trading, but that can easily change if more people move to this type of trading. We are seeing many countries in Africa have users moving to a peer to peer system due to either stringent government regulations and/or limited access to banks and financial systems.
Some of the most popular peer to peer trading systems are LocalBitcoins.com and Binance P2P. Other popular peer to peer trading systems include WazirX P2P, and Paxful.
Local Bitcoins has been around for many years, and has also been subject to scrutiny over the years by authorities in different countries where people use the platform. Each user has a trade reputation as they use the platform and some users will only interact with those who have a decent trade history. Both Binance P2P and LocalBitcoins operate on an escrow system where as the seller deposits the cryptocurrency into escrow with the P2P platform. The buyer will then pay in the agreed upon method and then submit verification of payment to the platform and the cryptocurrency is then released to the buyer.
This helps to ensure that one fo the parties does not run off with the other’s assets without executing their end of the trade.
Here are a few tips if you decide to use a peer to peer trading system to buy or sell cryptocurrency. First and foremost, make sure as you use the platform to provide feedback on those you interact with to help build up your rating and the credibility of those operating properly. Also, you will want to keep up to date on the market price movement to ensure your rates are realistic at current market prices. Give yourself some cushion if you are selling, meaning don’t set and then cancel orders as the price fluctuates slightly. Part of what you are offering if you are selling is a convenience fee so most will be willing to pay slightly higher than market prices on exchanges.
Also, if you are selling, the more payment options you accept, the more apt you are to receive offers for what you are selling. Peer to Peer trading is not for everyone as there are pros and cons to peer to peer trading systems just as there are pros and cons to traditional exchanges. It really depends on your location, your personal situation, and your needs as you decide if peer to peer trading is for you. But it is safe to say that as the world user base of cryptocurrencies grows, this is an important tool for many that will give them access to cryptocurrency trading and investing who in many cases would not have access to traditional exchanges.
The path to adoption flows through education and understanding the option of peer to peer trading is crucial, if not for your personal use case, then at a minimum for people you meet along the way as we spread the knowledge of what cryptocurrency is and why they need to be involved.
Content written by Blockchain Wayne and NewsCrypto Team
