Introduction to P2P Trading

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gingerbreadfork
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8 min read

Learn the basics of peer-to-peer trading and find out how to get established as one of the largest and most popular ways to exchange crypto.

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Peer-to-peer (P2P) trading is something that has been around long before cryptocurrency. Yet, even with this new revolution, it has become established as one of the largest and most popular ways to exchange crypto. While it is easy to do, and this is one thing that makes it quite appealing, if you want to become a serious vendor, you can learn to make sure you are best prepared to provide a fantastic service and profit from your endeavors.

What is P2P Cryptocurrency Trading?

P2P trading allows for the exchange of cryptocurrency between two or more parties. Often this occurs on a marketplace like LocalCoinSwap, where escrow protection is provided. Choosing to trade P2P allows you to remove much of the third-party involvement in your trades. P2P trading will enable you to trade with anyone else on your terms.

Why is Trading P2P Still Popular?

When it comes to just about anything, people have different needs. Providing for a broader range of people is where P2P trading excels. Even with the development of countless order-book style exchanges, this more personalized approach to trading has thrived and remained a staple of the cryptocurrency space.

While many platforms make claims about how easy they are to use, they often lack payment method choice and the ability to actually engage with other traders in a way that suits you. For a new trader looking to buy bitcoin for the first time, or a veteran trader that has been involved with cryptocurrency for yours, this form of trading has something for everyone.

How is P2P Different from Other Trading Styles?

Suppose you're only familiar with other trading types. In that case, you may not be aware of some of the similarities and overlap between P2P trading and other forms of cryptocurrency trading as it can be helpful when learning about P2P exchange to understand the differences and the similarities in different approaches to trading, using, or investing in cryptocurrencies.

Day Trading:
While day trading is a relatively broad term with slightly different meanings to different people, it generally refers to buying and selling an asset in a shorter time frame. If you buy and sell cryptocurrency throughout the day, you could consider yourself a day trader. Day trading can be combined well with P2P trading as a way to more efficiently be able to add more crypto to your trading account, or better yet, be able to cash out some of your gains after a profitable trade. There is a range of strategies employed by day traders, for example, scalping or swing trading.

Buy & Hold:
Many of us involved in cryptocurrency will be familiar with this type of cryptocurrency trading. It purely involves the accumulation of cryptocurrency, for which your primary intention is to hold for a more extended period. People worldwide are getting involved in cryptocurrency, and many of them are opting for this straightforward approach to getting some crypto exposure. If you become a P2P vendor, you will often come across these types of buyers, many of which can become regular customers. If the market is experiencing significant positive price action, you may see these same buyers return as sellers.

Arbitrage Trading:
While looking at crypto pricing for even the most popular digital assets like bitcoin, you may have noticed that there can be quite a bit of variance between different markets. There's a range of reasons these variations can occur, but whatever the case, arbitrage traders make it their business to trade these price discrepancies. Buying cheaper in one place and selling for a profit is the key to arbitrage, and this has a significant similarity to many of the approaches used by P2P traders, which we'll explore more in-depth later.

Margin & CFD Trading:
While different things, it's common to see traders dealing with one or the other often deal with both. Margin trading involves using funds borrowed against your own assets or other collateral to provide yourself with more trading power. For example, if you have 0.1 BTC and were trading with a 10x margin, price movements would affect your trade similarly to if you had a 1 BTC trade open without margin.

The contract for difference approach to trading is commonly referred to as CFD trading, involving no need to hold the underlying assets. When trading CFDs, you effectively form an agreement to trade against an asset's price with another party, typically an exchange. Both margin trading and CFD trading come with higher risk as you can, in the case of margin lose some or all of your assets if a trade goes against you, or worse, in the case of CFDs, you may lose more than you have in your trading account leaving you with a debt to pay.

Non-Custodial & Custodial Trading

Even if you've been involved in crypto for a while, you may not have heard these terms used before or don't know what they mean. Nonetheless, the importance of non-custodial trading is increasing as the landscape of cryptocurrency is evolving, alongside the lessons that major events in the history of cryptocurrency like the collapse of Mt. Gox have taught us.

Custodial trading can be found all around you; you've most likely heard of platforms like Coinbase that employ this form of trading. If a platform takes control of your funds, you can consider it a custodial exchange, and the trading you perform on that exchange will be of a custodial nature. Non-custodial exchange is far less common but is growing in popularity. Over time, many more custodial platforms have become insolvent or had other issues that have resulted in the loss of significant funds held on behalf of their users.

P2P trading can be an excellent fit for non-custodial trading. While some legacy platforms have unfortunately been resistant to evolve to fit into this new paradigm, some like LocalCoinSwap have leaped into providing non-custodial trading and wallets to users.

Non-Custodial Trading Checklist:

  • Does the wallet or exchange give you complete control of your funds?
  • Do you have access to your private keys?
  • Are you able to exchange without having to trust the platform with your funds?

If the answer to these three simple questions is yes, you are likely dealing with a non-custodial exchange or wallet. Always do your research to ensure that you are only ever giving up control to information that you are comfortable with, be that control of your assets or any other personal, private, or financial information.

Non-custodial marketplaces typically rely on smart contracts and bitcoin scripts to facilitate trades. Look for transparency when using these services by seeing if their contracts are available in a public space. LocalCoinSwap is a fantastic example of this; both the non-custodial bitcoin trading scripts and the ethereum and token trading contracts are published for open review over on GitHub along with other open-source material provided by the project.

Learn More About Non-Custodial Bitcoin Trading on LocalCoinSwap:

The Benefits of P2P Trading

There's a range of reasons people choose to trade P2P, and there's a range of benefits involved in this being an appealing way to trade. While some of them are relatively obvious, others you may not have yet considered.

Fairness & Equality:
Something arguably lacking in traditional finance is fairness and equality. While that could be a dense topic in itself, when it comes to P2P trading, everyone has equal opportunities to get involved. It doesn't matter who you are, where you're from; P2P trading is a resource you can use to access cryptocurrencies.

Flexibility:
There's a range of ways to trade crypto these days; however, most of them are still quite rigid in how you can use these platforms and services to trade. Most cryptocurrency exchanges offer minimum choices for payment methods to fund your account, often just as few for cashing out your cryptocurrency. A quality P2P exchange can provide you with a vast range of options to explore and an even wider variety of ways to trade.

Set Your Own Terms:
Often you may have specific things you preference or require to be comfortable and able to trade. When dealing with order-book style exchanges or instant exchange platforms, you have essentially no say in how you will be conducting your trades. P2P trading allows you to set your terms and only trade with others that match your requirements, whatever those happen to be.

Escrow Protection:
While some people may wonder why not just trade with people directly without any intervention whatsoever, this is an extremely high-risk practice and one that more often than not results in being scammed. You can trade with a complete stranger safely when using escrow on a P2P marketplace like LocalCoinSwap.

Reduced Platform Risk:
As discussed earlier custodial trading requires you to place trust in the platform you are using. While you may use a custodial platform for years, as many have learned, you can wake up one day and find out that you have lost your funds due to the exchange's actions. Insolvency, fraud, fractional reserves, and other harmful practices aren't exclusive to the dark horses or traditional finance; they are something you need to be just as wary of when it comes to cryptocurrency. At the same time, not all P2P marketplaces offer non-custodial trading, those that do provide vastly reduced platform risk.

Censorship Resistance:
Platforms with non-custodial wallets provide you a safety net from censorship. Provided you can export your private keys even if the platform was to go offline permanently; you could use these keys to access your funds using an alternative wallet of your choosing. Having control of your cryptocurrency is important for many reasons, and one of those is helping you avoid the various kinds of censorship in the modern world.

Increased Accessibility:
Not everyone has access to banking, let alone cryptocurrency. Financial exclusion affects a vast number of people across the world. P2P trading removed barriers to entry that would otherwise block people from services that give them more control over their finances and the ability to exchange value effectively. P2P trading helps provide financial independence and allows people access to modern financial tools through cryptocurrencies.

Is P2P Trading Legal?

While this is a fair question, the answer will primarily come down to how cryptocurrencies are regulated in your region. When being more general about this question, P2P trading is very much legal and a form of trading that extends far beyond just cryptocurrencies. Thankfully, many countries have not placed bans on cryptocurrency usage, but you may find some rules and guidelines you will need to follow.

Take care to ensure when trading, you are remaining compliant with your requirements to avoid legal trouble or other costly problems down the line. With some research, you'll generally be able to find the information provided by your government on what the laws and regulations surrounding the use of cryptocurrencies in your jurisdiction are. If not, you should find a regulatory body you can reach out to for further information.

P2P marketplaces operate under various jurisdictions worldwide; when using them, you will typically be expected to abide by your local laws and regulations surrounding cryptocurrency.

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