Have you ever spent some time thinking of whether to trade bitcoin on a P2P platform or a centralized exchange?
We ask ourselves that question often too. In this article, we discuss P2P marketplaces versus centralized exchanges.
Before we dive in, we will need to get some definitions out of the way. Usually, most people refer to all places that allow you to trade cryptocurrencies as exchanges. Further, more people refer to centralized exchanges as exchanges and peer-to-peer platforms as P2P marketplaces. Here is what both of them mean:
What is a peer-to-peer (P2P) marketplace?
A peer-to-peer exchange gives absolute control to traders. A P2P marketplace is a decentralized platform that directly connects buyers and sellers without intermediary or third parties. P2P marketplaces are very popular in regions with uncertain regulations on cryptocurrency use, like Nigeria, Ghana, Kenya, and India.
An example of a P2P platform is Paxful, the largest P2P marketplace by volume at the time of writing this article.
What is a centralized exchange?
Centralized exchanges (a regular exchange) use an order book to connect orders between people. However, neither the seller nor the buyer knows who the other person is.
There are several centralized exchanges that let you trade only crypto-crypto pairs and others that give you access to fiat-crypto trading pairs.
What should you use?
The answer to this question is not straightforward. Each user has different needs and reasons for trading cryptocurrencies. However, there are general things (like payment methods, availability in your country, and fees) that you need to consider,
Also, the trading experience is different between the two different types of exchanges, which may also influence your decision.
Buying bitcoin on regular exchanges
Centralized exchanges use an order book to connect orders between a buyer and a seller. When using a regular exchange to purchase bitcoin, you are required to make a deposit of your local currency, usually via bank transfer or credit/debit card.
There is usually a limit to the amount of money you can deposit on a regular exchange and several verification requirements.
These deposits come at a fee. For instance, an exchange that takes a 1% deposit fee, will take $10 from every $1000 deposit you make.
After, you can make your purchase via the exchange interface where you place a buy order at a particular price and wait for the order to fill. In some cases, you pay another fee while buying bitcoin on an exchange, called trading fee.
Your purchased bitcoin then gets sent to your exchange wallet.
Buying bitcoin on a P2P marketplace
On the other hand, the trading experience on P2P marketplaces like Paxful is different. First, you will have to select a currency, payment option, and enter the amount of bitcoin you want to purchase.
A list of sellers will load with information on the successful trades they have completed, their price for a bitcoin, and stock available for sale.
You can select any seller of your choice, proceed to a chat interface where the seller provides their payment details. You make the payment, indicate that you have paid, and wait for the seller to confirm. There are no deposit fees when using P2P platforms.
After the seller confirms, your coins will then be sent to your wallet.
Where do P2P marketplaces beat centralized exchanges?
Between P2P marketplaces and centralized exchanges, the process is more affordable when using a P2P platform. Aside from lower fees, P2P marketplaces beat centralized exchanges in other areas traders consider.
Unlike centralized exchanges that usually have few payment options, P2P marketplaces have several options for you to choose from.
For instance, Paxful allows you to buy and sell bitcoin with over 300+ payment options, including bank transfer, PayPal, mobile money, Bonga Points, and Western Union.
The availability of several payment options gives you the flexibility to trade with other people from other countries. Further, you do not have to move funds from one payment platform to the other just to buy bitcoin.
No Trade Limits
Centralized exchanges need to integrate directly with payment methods that differ depending on the region. Due to the finance industry’s delicate nature, some areas still have negative regulatory sentiments towards cryptocurrencies, which makes it impossible for centralized exchanges to operate there.
Nevertheless, the decentralized nature of P2P marketplaces makes it available in most parts of the world, including areas without clear cut cryptocurrency regulations. P2P marketplaces are censorship resistance.
Also, in situations where centralized exchanges are allowed to operate, limitations are placed on how much people can trade, deposit, and withdraw.
P2P marketplaces do not have deposit and withdrawal limits since the individuals manage the buying and selling directly. For example, deposits are instantly made to the seller’s account by the buyer.
In Africa, P2P marketplaces provide a better option for traders, as shown by this article’s comparison. If you are looking to use a P2P platform to buy bitcoin, check our article on how to buy your first bitcoin. If you are looking to get started with trading bitcoin (BTC) via a P2P platform, check out Paxful.