Peer-to-Peer (P2P) Crypto Trading: How it Works and its Impact on Cryptocurrency



Contemporary retail traders are used to working with centralized exchanges, but it can be a dangerous endeavor as demonstrated by the FTX fiasco. While most companies are trustworthy, the occasional chaff makes some investors worry. P2P exchanges do not allow to run strategies with crypto arbitrage signals or other sophisticated methods, but they offer something very valuable — transparency and safety.

It is possible for CEX platforms to be hacked or go insolvent. On the contrary, DEX platforms do not take your money into custody and do not compromise their clients or their funds when hacked.

What is P2P Trading and how does it differ from traditional trading?

Peer-to-peer trading literally means from one equal to another which is a great way to describe the process of exchanging digital assets in the P2P marketplace. All participants of the market use the same leveled playing field and swap assets by simply sending the required amount to each other after finding an offer that suits both parties.

Traditional trading is the approach the world of finance developed over the last century with people engaging with various financial markets using the services of middlemen like brokers and exchanges. While this model certainly has its merits and allows more people to jump straight into the action, P2P trading offers several important advantages:

  • You don’t need a middleman. Contemporary P2P platforms focus on providing complementary services and only match buyers and sellers. The biggest upside of decentralized trading is that exchanges do not take your money and allow two parties to directly engage in a trade. Some DEX platforms offer escrow services.
  • People are in control of their assets. A big argument in favor of decentralization in the “traditional trading vs P2P trading” discussion is the direct ownership of assets that you buy. A CEX platform will hold tokens for you, but you don’t really own them until you withdraw tokens to a crypto wallet.
  • Privacy and security. If you find a good trading partner, the issue of security is noticeably diminished since you are not afraid of being scammed. On the other hand, traders do not have to disclose as much personal information as in case with some heavily regulated CEX websites. Decentralized exchanges are also less regulated and can be used in many countries despite limitations imposed by their governments.

The Mechanics of Peer-to-Peer (P2P) Trading in the Cryptocurrency Space

A P2P crypto exchange is an open marketplace where buyers look for sellers and vice versa. An exchange simply allows users to publish their bids and asks to form a price bucket and gives everyone equal access to this information thus facilitating peer-to-peer cryptocurrency trading in an self-regulated environment.

It does not mean, however, that a P2P trading platform takes a “hands-off” approach and just observes how people send each other crypto. While such marketplaces exist (like Craigslist or Facebook trading groups), even they try to enforce some rules to protect users from being scammed out of their assets. Highly specialized decentralized exchanges offer various services like user ratings, testimonials, commentary, escrow services, and more.

An escrow can be presented in various forms:

  1. An exchange may have a separate wallet address to hold user funds temporarily until the parameters of a deal are agreed upon by both parties.
  2. A DEX platform my run a blockchain network and use smart-contracts to create escrow tokens that hold user funds until a deal is resolved.
  3. Some marketplaces have trusted users who take user funds and hold them until the exchange gives them permission to release the funds.

This approach is wildly different from what many retail traders are used to after years of using conventional exchanges where banks and other financial institutions take clients’ money into custody and take full responsibility for resolving trades. Since there are certain hierarchies in the conventional financial market, it is quite logical to have an arbiter.

When it comes to the P2P sector, all participants share the same legal responsibilities and exercise the same rights. In an environment where equals interact with equals, you don’t need an organization that takes control over every aspect of an interaction. Instead, you have entities that oversee the process and get involved only when market participants require their services.

The Benefits and Advantages of Peer-to-Peer (P2P) Crypto Trading

Some experts believe that P2P cryptocurrency trading is less efficient than centralized markets. It is true that orders may take more time to be resolved and looking for a potential trading partner can be a hassle, but many advantages of peer-to-peer crypto trading offset these inconveniences and allow for a much better overall experience for investors.

Here are some peer to peer cryptocurrency exchange benefits that you should consider:

  • Transactions are cheaper. Gas fees can be high during periods when networks are under severe stress, but these commissions are still lower compared to what centralized exchanges collect on each operation. When trading on a CEX platform, you will need to pay commissions for each trade on top of gas fees when withdrawing funds.
  • Self-regulated pricing. Since the market is full of different people who may want to sell at a discount to quickly liquidate their assets, you can always find a profitable deal. Many centralized exchanges engage in market making and may intentionally influence prices to increase trading volumes.
  • Enhanced privacy and security as well as transparency. These sound like things that should not coexist, but they do. While users only have to disclose some limited personal information, each and every transaction is recorded in the blockchain providing a much better environment for people who want to have control over their financial operations.
  • Direct transactions without intermediaries. You will interact with sellers and buyers without ever paying commissions or disclosing information that you don’t want to make public. The absence of regulators and centralized entities is one of the reasons why the cryptocurrency industry exists in the first place.

These advantages were made apparent during the so-called “crypto winter” caused, in part, by the collapse of one of the biggest CEX platforms FTX. The crumbling of this exchange and associated companies like Alameda Research exposed some glaring weaknesses in the cryptocurrency market that took quite some time to be resolved. Many investors started looking at P2P exchanges as safe havens and flocked to platforms like Uniswap and Pancakeswap.

The Risks and Challenges Associated with Peer-to-Peer (P2P) Crypto Trading

While it seems that decentralized trading is a perfect solution to all of the problems facing the world of financial markets, the lack of regulations in peer-to-peer crypto exchanges is a big issue for many retail traders.

Let’s talk about this problem and some others:

  • Unregulated markets breed criminal activity. It is not a secret that many tokens like Bitcoin, Monero, and Ripple are often used to launder money or pay for unlawful services and prohibited products. We are still struggling to find a good middle ground between regulations and decentralization.
  • Scams in P2P trading platforms can run rampant even with supervision from decentralized marketplaces. You simply cannot guarantee that a person won’t decide to steal assets even after thousands of successfully completed trades. Escrow is the only way to protect your deals from scammers.
  • Slow pace of trading. It is not an issue for people who are in the cryptocurrency market for the long term. If you plan to slowly build up your portfolio and wait until your tokens appreciate, using P2P marketplaces is a great idea. However, retail traders who want to make money by speculating simply cannot use P2P due to slower order execution speed compared to conventional CEX platforms.
  • The lack of a service ecosystem. Centralized exchanges are integrated with thousands of different vendors offering services like automation, copy trading, analytics, portfolio management, price comparison, and more. Even if DEX platforms would do all of that, the very nature of P2P trading makes many of the previously mentioned tools useless.

Other P2P crypto risks include price volatility, low liquidity, and asymmetry in orders. You may simply not find a counter-offer of the same size or fail to sell due to the lack of buyers. A price may also change dramatically while you are finalizing a deal on a P2P platform.

Some of these issues can be mitigated, but it will require some centralization and oversight which is not what many crypto enthusiasts want. If blockchain networks will improve on their technology and increase the throughput while maintaining the necessary level of transparency and security, it will be possible to create a faster and more convenient ecosystem. Right now, it is too rigid and slow to become truly mainstream.

The future of Peer-to-Peer (P2P) crypto trading

Some people have been using exclusively Bitcoin peer-to-peer meaning that they do not engage with the larger cryptocurrency market and focus on buying and selling only $BTC directly to various trade partners. It is a valid approach for diehard enthusiasts and people who consider Bitcoin to be the next iteration of global currency.

If the rate of crypto adoption will increase in the nearest future, it is possible that peer-to-peer crypto trading will become something that millions of people engage in. However, this system will still be far from ideal and won’t be able to support a massive volume of transactions without a significant overhaul and many improvements to the throughput capacity of all popular blockchain networks.

The question of mass adoption is another concerning issue for all investors who contemplate crypto investments. What is P2P trading for a regular person? It is a complicated process that must be conducted for something that VISA or PayPal can do conveniently and without any hassles. Places that accept crypto do it reluctantly while many big “wins” of the crypto community turned out to be public stunts.

For example, the El Salvador’s generous giveaway of millions of dollars in Bitcoin did not increase the number of accepting $BTC as much as the government anticipated. While it is still touted as a big advancement, the reality is that people still don’t know how to use crypto and many are unwilling to learn even if the way we use it will simplify dramatically.

P2P marketplace trends indicate that the current direction is to streamline processes that are already established without trying to invest in networks that can grow and expand faster than Bitcoin. Another big limiting factor is the slow growth of decentralized finance and the number of failing DeFi platforms that only reduce investors’ confidence in the future of the whole industry.

Many people believe that the role of blockchain technology is quite significant for the economy, but the whole world must see actual use cases and better performance compared to financial tools readily available to the general public right now.

If the industry around the P2P sector stays the same

Despite what many crypto enthusiasts want you to believe, the true purpose of cryptocurrencies is in their utility as value storages and the speculative potential. Retail traders and smart investors found many ways to profit from the market. The CEX sector will see even stronger growth in the years to come. It is almost certain that the P2P trading will never catch up in volume.

There are several industries focused on providing specific services and products to people interested in retail crypto trading. The analytical platform TradingView has experienced an explosive period of growth due to the influx of investors interested in buying various tokens. The industry of crypto trading software is quickly becoming a juggernaut as more and more retail traders realize that using automation for crypto is a good idea.

It is highly unlikely that the P2P trading sector of the cryptocurrency industry will provide the same flexibility and opportunities to many investors interested in trading digital assets. The only hope for P2P is that several new DeFi platforms will revolutionize the way we use financial services and deliver incredibly useful and efficient products to attract more people to the web 3.0 ecosystem and motivate everyone to learn how to use crypto wallets.

The main takeaway

A P2P trade is a good way to securely exchange tokens for other digital assets. It is a method employed by millions of crypto enthusiasts, but the trading volume is still only a fraction of what is achieved daily in the CEX sector. If you are serious about owning and using crypto in the future, learning nuances of P2P trading is certainly a good idea. However, many retail traders, investors, and one time buyers will feel way more comfortable trading on platforms like Binance or KuCoin.


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