In the world of Bitcoin exchanges, the vast majority of trading activity takes place through centralized platforms. This is rather strange, considering that Bitcoin is a decentralized and peer-to-peer protocol for digital money transfers. Over the years, it seems that people have lost track of why peer-to-peer exchange solutions matter, particularly for buying and selling Bitcoin. But what makes these concepts so special to begin with?
P2P Exchange Of Value Is The Right Way To Go
No one should think that centralized and peer-to-peer exchange platforms cannot co-exist. Both types of trading platforms have their own merits and cater towards the need of users in different situations. Centralized platforms are useful for traders who like quick and convenient order book matching. Moreover, centralized Bitcoin exchanges are not difficult to come by these days.
But their peer-to-peer trading counterparts offer a few things that other exchanges simply cannot. Selling and buying Bitcoin or other cryptocurrencies for national currencies without entrusting funds to an intermediary is the primary selling point. After all, when using an exchange such as Coinbase, Kraken, or BitStamp, the company controls both the fiat currency and cryptocurrency balance until users move funds off the platform again.
In a peer-to-peer trading setting, funds move directly between multiple parties. This type of practice makes buying and selling safer on paper, even though it can bring some other logistical problems to the table. Dealing with large quantities of Bitcoin is always a risk, but those problems are not inherent to only cryptocurrency traders.
There is another reason why peer-to-peer trading platforms are appealing to specific users, though. Unlike the centralized counterparts, a P2P environment allows for privacy. Given the recent scrutiny by the IRS against the Coinbase exchange, it is understandable why not everyone wants to leave a paper trail of their Bitcoin buying and selling habits. Don’t be mistaken, however, in thinking that this automatically has something to do with tax evasion.
Traditional Bitcoin exchanges forced users to verify their identity, through a Know-Your-Customer procedure. Peer-to-peer Bitcoin platforms don’t always require verification, allowing for users to only expose their data to people they conduct business with. It is up to the peer-to-peer platform in question to ensure that this information remains safe from prying eyes by using encryption or the Tor protocol.
But there are some drawbacks to P2P exchanges that make them less suited for most cryptocurrency traders. Advanced trading features are absent, and order books are hosted on the user side. Executing trades can only be done when both parties are online. It is possible that these features will improve over time, but for now that is the price to pay to get rid of centralized Bitcoin exchanges.
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