What Is P2P Crypto Trading? How Does it Work on Crypto Exchanges? – MUO – MakeUseOf
Is P2P crypto trading better than using a regular crypto exchange? Here’s what you need to know.
What comes to mind when you think of crypto trading? Charts and systems that are hard to understand? Many people see it this way, but it isn't always so. There are easier trading methods that do not require reading and interpreting technical chart patterns, and one of them is P2P crypto trading.
In this guide, we will explain what P2P trading is and show you the basic things you should know in carrying it out.
Peer-to-peer (P2P) trading refers to decentralized exchange markets that allow users to buy and sell cryptocurrencies directly with one another. The trading method differs from centralized exchanges because it is less vulnerable, and no middle agent controls your funds during a trade.
When you place an order on a P2P exchange, it is matched against pending orders from other users. The trades are then executed instantly, and you only pay a small network fee as compared to that charged by centralized exchanges. The advent of blockchain technology popularized the P2P trading model.
P2P trading works without the need for a central authority, meaning that it is completely decentralized. Furthermore, the system is based on peer-to-peer protocols, permitting users to directly connect with other users to trade cryptocurrencies without passing through a middleman.
Although there are P2P platforms, they only serve as a medium for connecting buyers and sellers. Instead of having a single server run by a central authority, many servers run the same software, and this process is facilitated by using smart contracts.
A smart contract is a set of instructions that automatically executes when certain conditions are met. In this case, the smart contract executes when two parties enter an agreement and transfer funds from one account to another. The contract then releases the funds to the seller and transfers ownership of the item to the buyer.
In traditional finance, this process is carried out by banks and other financial institutions. These institutions are responsible for storing and transferring funds from one account to another. They also verify transactions and record them in their ledgers.
In P2P trading, third-party involvement is not needed because all participants are equal in rights and obligations. Instead, the system relies on consensus algorithms to verify transactions and prevent double-spending. Every participant has a copy of the ledger containing information about all transactions performed by all other participants in the network.
To reduce the chance of being duped when trading, most P2P platforms use a rating system so that traders can identify trusted traders by their ratings. Then, before initiating an exchange, you only need to check traders' reviews to ascertain their reputation.
Below are three common P2P trading strategies.
You can start to use arbitrage to your advantage. That is, buying cryptocurrency for a lower price in one place and then selling it elsewhere at a higher price. Many P2P traders use this trading strategy—they make money through price variations that could be caused by volatility, liquidity, or regional differences.
Using Binance as an example, you can search for cryptocurrencies available on the Binance spot and P2P markets, then go through the prices till you find a notable price difference that will make it easy to buy at a lower price and sell at a higher price.
You can buy and sell ads on some P2P marketplaces, like Binance. When setting your price, you can set a lower price to reach more customers or a higher price to generate more revenue. It all depends on your business goals.
People usually pay more to use a specific payment method that is hard to find elsewhere. An example of such is the fiat option, which is not common on P2P exchanges. People who find transacting in their local currencies more convenient will have to pay more if such a currency is not commonly used.
In using this strategy, you can buy more accessible crypto at a price close to the market price and then sell it using another payment method that is less accessible. With this, you can make more money from those willing to pay more for convenience.
Listed below are some key benefits of peer-to-peer trading.
P2P crypto trading gives you access to many buyers and sellers. You can transact with traders worldwide. Moreover, even if your country restricts crypto, you can trade on P2P platforms since central authorities do not regulate them.
Traders offer their preferred payment methods, and you'll find many different payment methods on P2P platforms. You only have to trade with whoever offers a method that is most convenient for you. You are not as restricted to payment methods as on centralized exchanges.
Since you transact with other users directly, you are given the freedom to do so with little or no extra cost. P2P platforms charge very low fees, and some even provide free services.
P2P platforms offer escrow services in which they will hold funds until terms are reached between traders. The security feature uses encryption and two-factor authentication to initiate secure transactions.
The less popular P2P trading platforms might experience low liquidity from time to time. Trading in an illiquid market requires more time to complete trades. Low liquidity also influences the price of the currencies. This issue can be curbed by trading on popular P2P exchanges.
P2P trading can be carried out relatively quickly once traders reach terms as early as possible. But in a situation where one trader fails to agree to or confirm terms, the process is delayed.
The risk of losing money to scammers is a major issue with peer-to-peer trading. Therefore, you must always take measures to confirm transactions and use trusted trading methods.
Traders can get easily scammed when exchanges involve transacting through additional platforms. Therefore, you must be careful enough to confirm that the other trader has met all requirements before agreeing on terms. Don't be in haste when carrying out P2P trades!
In your search for a suitable P2P platform, there are certain conditions you must look out for.
P2P crypto trading platforms offer better opportunities to earn than traditional exchanges because there are no central authorities that set the prices. As a result, they typically provide better exchange rates and lower fees. P2P platforms also usually have higher liquidity than traditional exchanges because of the number of people using them. As a result, you won't have to wait long until you find a buyer and seller for your asset.
Temitope is a writer and crypto trader. He is especially interested in FinTech and writes about cryptocurrency, non-fungible tokens (NFTs), and blockchain.
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