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Cryptocurrency Exchange

How Peer-to-Peer Crypto Exchanges Work: Is the P2P Connection Worth The Cost?

Peer-to-peer cryptocurrency exchanges brought with them an aspect of decentralization improving privacy compared to centralized exchanges. While both are ideal for buying and selling cryptocurrencies, they differ in how they handle transactions and what users pay for using them.

On centralized exchanges, buy and sell orders are placed in an order book. The exchanges then match the orders. From the surface, users can think they are interacting with each other while, in essence, they are interacting with the exchange.

For example, if John wants to buy Bitcoins worth $20, he sends the money to the exchange website. Similarly, a seller transfers Bitcoin on the exchange website. When there’s a matching sell order, the exchange transfers $20 to the seller and credits John with an equivalent in Bitcoin.

However, matching buyers and sellers comes at a hefty fee. For example, some centralized exchanges take a cut of all deposits and withdrawals. Another inconvenience of centralized cryptocurrency exchanges is the waiting period and the risk of losing your cryptos or fiat deposits. The waiting period is dictated by how fast or slow a match is found in the order book. With hackers always on high alert looking for who to devour next, leaving your wealth on a cryptocurrency exchange means its safety, no matter how secure the exchange claims to be, cannot be guaranteed 100 percent.

Can a P2P Exchange Guarantee Security?

To a great extent. P2P platforms operate on a different model compared to ‘regular’ crypto exchanges. P2P exchanges mainly act as escrow services. They use exchange software to establish a peer-to-peer connection between buyers and sellers. With centralized exchanges matching orders in an order book, P2P platforms match the people behind the orders. Notably, the exchanges do not automatically fulfill the orders, but it lets buyers and sellers interact without a third party unless disputes arise.

Although some of these semi-decentralized exchanges offer cryptocurrency storage functionalities, sellers can opt to store their cryptos outside the platform reducing the risk of being hacked. Examples of peer-to-peer exchanges are LocalBitcoins, Bitzlato, Local.Bitcoin.com, localcryptos, LocalEthereum, and Agora Desk.

Over time, some of these exchanges have changed their terms-of-use and now require users to undergo a mandatory know-your-customer (KYC) procedure, thus reducing the privacy and anonymity they once provided. For instance, LocalBitcoins, the leading P2P Bitcoin exchange, requires users to provide their email, phone number, proof of address, etc.

However, others like Bitzlato provide reasons for cashing out from a P2P platform by providing privacy and anonymity by eliminating the need for a KYC procedure.

Apart from providing privacy, Bitzlato has a referral program that offers up to 90 percent service commission for transactions of invited users. The amount received as commission depends on the trading volume of the invited friends. The commission is earned for the entire time the referral program is active. A referral link can be recommended to friends, shared on forums, used by bloggers, used in contests, paid advertising, and e-commerce.

But, are P2P Exchanges Worth The Cost?

Do you think the convenience brought by these platforms is for free? There’s a cost – a heavy one at that. You’ll almost always receive a price below the market/spot price.

Reason? On centralized exchanges, the spot price for Bitcoin and other cryptocurrencies comes from a large group of traders placing buy and sell orders simultaneously. But for these semi-decentralized crypto platforms, the price is set by a few traders each with their own prices with eyes fixed on the profit margin.

As such, prices on P2P crypto exchanges range between 1 and 15 percent below the market price.

Let’s look at a few examples

LocalBitcoins – Here you can get a price of 0.5 percent below the spot for large orders of over $800. However, smaller orders can cost you 1.5 percent below the spot price.

Localcryptos – Bitcoin (BTC) and Ethereum (ETH) can be traded at 4 percent below the market price.

Agora Desk – This deals primarily in BTC and Monero (XMR) trades. While its services are fast, it offers prices -10 percent the spot price.

Local.Bitcoin.com – This is a Bitcoin Cash peer-to-peer exchange. In the United States, buyers post offers with a price of 0.5 percent under market price. Unfortunately, in some circumstances the difference between the buy offers and spot price can reach highs of 6 percent below spot. Also, the offers can have a price of 3 percent below market prices when selling large amounts through Skrill or Cashapp.

Hodlhodl – Offers on this peer-to-peer exchange have an average price of 3 percent below the spot price.

Considering the staggering difference between the spot prices and buyer orders on P2P platforms, centralized exchanges are the best. However, if you’re using peer-to-peer exchanges to liquidate for day-to-day expenses, then you’re better off with P2P exchanges. Additionally, if privacy is a significant concern, most peer-to-peer cryptocurrency exchanges will satisfy your needs.

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