Risk Management for P2P Vendors

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gingerbreadfork
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6 min read

Understanding risk management is one of the keys to being a profitable P2P vendor.

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Understanding risk management is one of the most important aspects of being a P2P trader, or any kind of trader for that matter. Whether you are investing in crypto in the short term, long term, vending P2P for a little extra money, or making it your full-time job, it is crucial to consider. How averse someone is to risk will always vary, so the essential part is not doing what may be suitable for some people; instead, understanding the primary factors and making some decisions for yourself.

Managing Your Funds to Avoid Overleveraging Yourself

A common mistake new traders make is overleveraging themselves. While you may think setting your trade limits to the max possible you have on hand provides the most profit potential, it does put you at risk of having failed trades or leaving your customer with a bad experience.

For example, say you had one bitcoin you were trading with, and someone opens a trade with you for a whole bitcoin, that could be great. However, if you accept the trade and don't pause your other offers, you may find yourself getting held up by a disputed trade while another customer is waiting for you to accept a trade. If you want to maximize your trade offer limits, especially early on, either pausing your offers or not accepting trades while you don't have the funds involved in an active trade can help you avoid hassles later.

You could also find yourself in a situation where an unexpected sudden increase in network activity causes an increase in the fees required to move coins quickly. Shifts like this could result in you either having your customer wait a long time or coming up short for your trade. Even worse, after spending more than you anticipated on fees potentially resulting in a failed trade, you can only hope your customer is open to re-opening the trade for a little less.

Don't accept more trades than you can handle, and if possible, try and ensure you have some funds put to the side to help you react to trades with ease, not rely on the hoping that things go to plan. If you are buying your crypto to respond to trade requests instead of ensuring you have adequate crypto on hand, treat your buying power the same way, whether it's stablecoins, fiat in a trading account, or something else. Keeping your trades manageable keeps your stress levels low and your customers happy.

Understanding Volatility

Even though bitcoin has been around for over a decade now, it's still a very volatile asset compared to gold or established stocks. Even though bitcoin's volatility can be an amazing ride, it can cause you problems when trading P2P if you aren't careful. The same can be said for Ethereum (ETH) and newer cryptocurrencies like Polkadot (DOT).

If you are only keeping a small amount of crypto on hand for your next trade or reactively buying your crypto to meet the requests you receive, you will be better positioned to ensure your trading is profitable. The important thing to remember is the crypto market can shift extremely fast, so making sure your trades are completed and finalized quickly can help you make sure that you end up with a profit at the end of your trade.

Monitoring the markets for big news can be helpful. Still, many of us simply don't have the time to have our eyes on the charts and the crypto news all day, but being aware of upcoming forks and other causes for higher than average volatility can help you stay prepared at crucial times. If you are nervous during more extreme market volatility, "holiday mode" can let you sit on the sideline for a little while until you are comfortable to resume trading.

When deciding on your pricing, consider volatility and how it can affect you. If your margins are too tight, you may experience a slight market movement that could turn a profitable trade into a loss, so stay competitive but make sure you aren't putting your profitability at significant risk.

Fast Trading for More Predictable Outcomes

Getting your trades completed quickly and efficiently can help you manage the risk of volatility and help you be ready for trade requests that could come in at any moment. Having your notifications enabled for SMS, Telegram, or email helps to ensure that you will be notified of potential trades as soon as possible. When you are buying your crypto elsewhere, it may be beneficial to have funds ready in that account so that you aren't waiting on an extra transaction while the deposit is processed.

Suppose you are using a platform like LocalCoinSwap, which supports non-custodial trading. In that case, you can even take advantage of integrations like MetaMask when trading ethereum or ERC-20 tokens to avoid having to send funds to your wallet on the platform, reducing the number of on-chain transactions involved in each trade.

Don't underestimate the value of clear communication when dealing with your customers. When sending important information to your customers, try and provide clear and concise information, especially when sending sensitive data like payment instructions. If it's clear the first time, they know where to send payment without needing to clarify anything later, and you have less chance of dealing with potential mistakes.

There are several practical and straightforward things you can do like this that can improve your average trade time. If you are trading on the move, make sure your phone or laptop is always charged, so you aren't searching for a charger in the middle of a trade. Even elementary things like having all your important sites related to your trading bookmarked in your browser and ready to go can result in time savings that add up over time and might just be the thing that saves you from excessive volatility one day.

After completing your first few trades, look back, and see if there are any areas you could do better in the future. Fast trades are more predictable and help you maintain as much of your profit margins as possible with more consistency.

Tips for Deciding on Trade Limits

  • Always assume your last trade could get delayed.
  • Consider how frequently you are getting trade requests.
  • Design your limits to allow you to have two or more trades in progress
  • If you get overwhelmed, pause your trade offers to avoid disappointing customers.
  • Account for a margin of error in regards to changing network fees and volatility.
  • Lower trade limits for higher-risk payment methods can reduce the impact of charge backs.

Dynamic & Static Pricing Algorithms

If you are a new trader creating an offer for the first time, you may wonder what the difference is between static and dynamic pricing. For most vendors that leave their offers active for longer periods and are reactive to trade requests, dynamic pricing will be the most common choice. However, if you are a more casual trader or would like a specific price for some digital assets you would like to sell (or buy) at a particular price, you can set dynamic prices for your offers.

Static pricing maintains a particular price point; if you've used an order-book style exchange before, you may find this resembles a limit order quite closely. Dynamic pricing is somewhat similar to a market order in that it will shift with the market price, with a preset margin you have added to ensure your offers are always at a percentage above or below the market price you would be happy to sell at, allowing more predictability.

I want to sell my bitcoin at an all-time high?

Set your pricing to static and manually set the price to this price point. If the price exceeds the all-time high, your trade offer will become quite enticing for other traders. Static pricing is excellent when you would only be happy to sell at a specific price point.

I want to sell crypto on a regular basis?

In this case, unless you want to adjust pricing as the market changes manually, dynamic pricing will be the most suitable to help you remain competitive as the market price shifts. For more advanced traders, you may want to set up a custom pricing algorithm supported by some P2P marketplaces like LocalCoinSwap.

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