P2P A-Z: An introduction to P2P trading
The concept of P2P trade predates cryptocurrencies. Despite the upheaval, it has quickly become one of the most used and widespread methods of trading cryptocurrency. It's simple to get started, which is a major draw, but if you're serious about becoming a vendor, you may take the steps necessary to ensure you're ready to offer a great service and make a profit.
P2P Cryptocurrency Trading: What Is It?
P2P trading facilitates the buying and selling of cryptocurrencies between users directly. This frequently occurs on marketplaces like LocalCoinSwap, which provide escrow services to safeguard both parties. Trading peer-to-peer (P2P) allows you to minimise or eliminate the participation of intermediaries. Through P2P trading, you may conduct business with anyone on your own terms.
What keeps peer-to-peer (P2P) trading afloat?
People have varied requirements for pretty much everything. P2P commerce shines when it comes to serving a wide variety of customers. Despite the proliferation of order-book-style exchanges, the more customised approach to trading in the cryptocurrency field has flourished and persisted.
Many platforms boast of user-friendliness, but few provide you the flexibility to utilise the payment method of your choice or communicate with other traders in the way that works best for you. This type of trading is suitable for both novices interested in buying bitcoin for the first time and seasoned professionals who have been dealing with cryptocurrencies for years.
What makes P2P trading unique from other methods?
Let's say your experience with trading is limited to other venues. Understanding the distinctions and the similarities in different techniques to trading, utilising, or investing in cryptocurrencies may be useful when learning about P2P exchange, but you may not be aware of some of the overlap between P2P trading and other kinds of cryptocurrency trading.
Although the word "day trading" covers a wide range of activities and might have somewhat varied connotations depending on who you ask, it typically refers to the practise of purchasing and selling an item within a day. You may call yourself a "day trader" if you regularly purchase and sell digital currencies during business hours. Day trading and peer-to-peer (P2P) trading work well together because they facilitate the rapid addition of cryptocurrency to your trading account or, even better, the rapid withdrawal of profits. Day traders can use a variety of tactics, including scalping and swing trading.
For those of us who have traded cryptocurrencies before, "buy and hold" is perhaps the most recognisable strategy. The only thing involved is stockpiling cryptocurrencies that you want to keep for a long time. This simple method of gaining crypto exposure is appealing to a growing number of people who are interested in the rapidly expanding cryptocurrency market. As a P2P merchant, you'll likely run into these consumers rather regularly; some of them may even become regulars. This group of purchasers may reappear as selling if the market experiences sustained upward price movement.
It's possible that you've seen significant price discrepancies across various marketplaces when researching crypto assets, even for the most widely traded ones like bitcoin. Arbitrage traders specialise in taking advantage of these pricing differences, which can arise for a number of different causes. The essence of arbitrage is to purchase goods or services at a discount in one market and resell them at a higher price in another, a strategy that bears many similarities to the practises of P2P traders, which we will examine in further depth below.
Although Margin Trading and Contracts for Difference (CFDs) are distinct, many traders engage in both. When trading on margin, you borrow money against the value of your assets or other collateral to increase your purchasing power. If you have 0.1 Bitcoin but are trading with a 10x margin, the effects of price changes will be the same as if you had a trade open for 1 Bitcoin but no margin.
CFD trading refers to the practise of trading through a contract for difference and does not need the trader to physically own the underlying assets. Contracts for difference (CFDs) allow investors to speculate on future price movements of underlying assets through an agreement with a third party, generally an exchange. When trading on margin, it is possible to lose all of your funds if the deal goes against you, and when trading CFDs, it is possible to lose more than you initially invested, leaving you with a negative balance and a bill to settle.
Currency Exchange, Both Non-Custodial and Custodial
You may not be familiar with these phrases even if you've been working with crypto for a long. However, as the cryptocurrency ecosystem develops and we learn from seminal events in the history of cryptocurrencies like the demise of Mt. Gox, the significance of non-custodial trading grows.
Non-Custodial & Custodial Trading
You're probably familiar with custodial trading since you've heard of exchanges like Coinbase that use it. Once a platform has custody of your assets, it is considered a custodial exchange, and any trading you engage in on that exchange will also be considered custodial trading. It's far less frequent to do non-custodial exchange, but it's gaining popularity. Many other custodial systems have gone bankrupt or experienced other problems that caused them to lose access to users' money.
When it comes to non-custodial trading, P2P might be a great option. Some older platforms have been slow to adapt to the new paradigm, while others, like LocalCoinSwap, have jumped in with both feet, giving their customers access to non-custodial trading and wallets.
An Inventory of Things to Do Before Engaging in Non-Custodial Trading
Do you have full access to your money with this wallet or this exchange?
Private keys: do you have access to them?
Can you trade without giving your money to the platform?
Answering "yes" to these three questions should give you confidence that you're working with a non-custodial exchange or wallet. Do your homework before handing over any sensitive information, whether it's financial or otherwise, to ensure that you're not putting yourself at risk.
Smart contracts and bitcoin scripts are frequently used by non-custodial markets to ease transactions. Verify the company's commitment to openness by reading their contracts in a public forum before engaging their services. You can see this in action with LocalCoinSwap, where all of the project's open-source code, including the scripts for non-custodial bitcoin trading and the contracts for trading ethereum and tokens, are available for public inspection on GitHub.
The best bits of P2P trading (besides trading with BB):
People engage in peer-to-peer (P2P) trading for a variety of reasons, and the many advantages of P2P trading make it a popular method of exchanging goods and services. Several of them are more evident than others, but there are some that you could have overlooked.
Equality and fairness are two qualities that, perhaps, are missing from conventional finance. Despite the complexity of the issue at hand, everyone is welcome to participate in P2P trading. Anyone, no matter their background or location, may utilise P2P trading to gain access to cryptocurrency.
Trading crypto can be done in a number of different ways now, but many exchanges, wallets, and other services are still rather limited in their adaptability. The number of deposit and withdrawal options on most bitcoin exchanges is few. If you find a reliable P2P trading platform, you will have access to a plethora of trading possibilities and alternatives for exploring those options.
You may decide on your own conditions, as everyone has different preferences and needs when it comes to making and accepting trades. Whether you're working with an order book-style exchange or an immediate exchange platform, you won't have much control over how your transactions are executed. With P2P trading, you may negotiate your own conditions and conduct business solely with people that meet your specific criteria.
Some may question the need for an escrow service, reasoning that it's riskier to deal with strangers online without any protections in place. However, escrow services mitigate this danger. When utilising escrow on a P2P marketplace like LocalCoinSwap, you may safely deal with a total stranger.
The platform risk associated with custodial trading is reduced because, as we've seen, you have to put your faith in the custodian. Despite the fact that you may have used a custodial platform for a long time, it is possible that your cash will be lost owing to the exchange's activities one day. Be aware of bitcoin just as you would of the black market or traditional finance; insolvency, fraud, fractional reserves, and other damaging behaviours are all present in both. However, not all P2P marketplaces allow non-custodial trading, but for those that do, the platform risk is greatly decreased.
Resistance to Censorship: Platforms that offer non-custodial wallets protect your cryptocurrency holdings. If you have the option to export your private keys, you may use them with whatever wallet you choose, even if the platform were to go offline forever. One of the many reasons why keeping your cryptocurrency under your own control is crucial is so that you can stay one step ahead of the different forms of censorship that exist today.
Wider Availability: Traditional banking and cryptocurrencies aren't available to everyone. Many individuals all throughout the world suffer from financial exclusion. As a result of peer-to-peer trading, formerly insurmountable hurdles to accessing services that grant users greater financial agency and the capacity to effectually trade value were eliminated. P2P trading facilitates monetary autonomy and provides access to cutting-edge monetary technologies by way of cryptocurrencies.
Can I legally engage in P2P transactions?
Even while this is a valid concern, the solution mostly depends on the laws of cryptocurrency in your country. In a broader sense, the answer is yes; P2P trading is an accepted and legal method of conducting business that is not limited to digital currencies. Fortunately, many nations have not outright banned cryptocurrency use; nonetheless, you may be required to adhere to certain regulations.
In Australia, conducting a trade between two individual parties as a once off transaction here or there, will not garner much attention; for instance, the local authorities won't be knocking your door down for selling some Bitcoin to your grandma! However, should the circumstances around your transactions change - such as the frequency, volume, or type of transactions - then your trades may be considered the provision of a designated service. In other words, you may be operating a business specialising in cryptocurrency trades.
Businesses who provide such services in Australia are known as 'Digital Currency Exchanges' (or DCEs for short) and are required to be registered with AUSTRAC. For more information on AUSTRAC's role in the Australian Cryptocurrency ecosystem, click here.