You’re reading this because you want to buy cryptocurrency. You may be wondering what the best way is to get into cryptocurrency. Well, there’s two options, Peer-to-Peer (P2P) exchanges, and centralized exchanges. You also might be wondering what the difference is between the two, and you’re definitely wondering which one is best. You’re in luck because we’ve got the answers. Just read on.
First, let’s look at your good old centralized exchanges. With centralized exchanges, such as Coinbase, Coinsquare, and Binance you can buy, sell, and trade cryptocurrencies with fiat currency. But there’s a catch. A couple, actually. But let’s first dive into what an exchange really is:
How Centralized Exchanges Work
An exchange is a centralized entity that aggregates orders from buyers and sellers and matches them. Even though it may seem like you are directly trading with other people, the exchange is actually matching you with a trade partner and executing the trade on their own end. Exchanges allow you to trade with anyone else, but all of it has to happen through them, they are an intermediary.
Let’s use Bitcoin as an example, and get an overview of the whole process that occurs within centralized exchanges.
You’re from Canada, have some extra savings lying around doing nothing, and want to buy $500 CAD worth of Bitcoin to expose yourself to this new and exciting asset class. You evaluate your options and end up choosing Coinbase as it has been around for a long time and seems like a secure website. So, you head to their site, sign up, submit a bunch of sensitive information to their servers, and connect your debit card.
You are about to buy, but then you notice an alert warning that you cannot complete your transaction because you have a $250 weekly limit. Hmmm, okay. That’s not ideal, but it doesn’t deter you. You lower your buy amount to the weekly limit of $250 and you are about to click buy when you notice something alarming. There’s close to a $10 fee on your deposit, and you calculate that they’re charging 3.5% which isn’t clearly noted anywhere during the sign-up process.
“Why so high?” you may be wondering… So, you pause and ponder your options, do I go through with it? Or do I try out another exchange? You’ve already gone through this arduous process of signing up through Coinbase but you get cold feet.
You look around again and you find an exchange called Coinsquare, based in Canada. You sign up for an account, go through a similarly demanding process and see that the fee on deposits is 2.5%, better, although still high for your liking, you’ve already spent so much time on this that you deposit your FIAT currency. Now you have to wait five days for the funds to show up in your Coinsquare account, then you will be ready to trade.
Now you specify the amount of Bitcoin and price in CAD you want to purchase at. Let’s see what’s happening on the back-end. This request known as a ‘buy order’, is placed in the ‘order book.’ When another person wants to sell Bitcoin, they either look for an offer they like in “the order book” or, if none can be found, create their own ‘sell order’, specifying the terms that they want. Whenever possible, the exchange matches buy and sell orders by price and processes the trades. Now when you want to withdraw your money, you see there’s another 2% fee. You need the money so you do it, and it takes a full week for it to arrive in your bank account.
One issue with centralized exchanges you can clearly see is that they take a big cut of your fiat currency on deposits. These fees can add up when you’re buying a lot of cryptocurrency. Not to mention, many of these exchanges also take a cut on your withdrawals, so you can’t enter and exit these exchanges freely. There’s almost always a hidden fee lurking in their terms of service whether you’re putting in or taking out money.
The waiting periods can also be extremely inconvenient, especially with the volatility of crypto-markets. They can prevent you from making a profit or stopping a loss. These problems are all because of custody laws mandated by central banks and the state government.
Let’s also not forget that using a third party means you must put your trust in them that their software won’t be hacked, and that your funds will be stored and processed securely and safely. This is not a guarantee by any means.
The main advantage of cryptocurrencies vs fiat currencies is that cryptocurrencies minimize the degree of friction when exchanging assets online or internationally. Because it is decentralized, you can send your assets to the recipient and it is just you and that person involved in the transaction. Introducing third-party exchanges such as Coinsquare goes against this idea because these exchanges work with banks and payment providers. Thus, when using these centralized services, nothing is decentralized as these companies still have to work together to complete digital transactions. Purchasing digital assets through this method has diluted the fundamental ethos cryptocurrencies have to begin with; decentralization & financial autonomy.
How P2P Exchanges Work
Now let’s see what P2P exchanges are, how they work, and their alignment with the decentralization and trust-minimization tenants of cryptocurrencies.
P2P exchanges allow buyers and sellers to trade directly with one another without having to trust a third party to process their trades. This alternative approach has several advantages, especially if you are concerned about fees and trust.
First fees are much more reasonable on P2P exchanges. Fees on most P2P exchanges range from 0%-0.7%. Transactions are made when buyers/sellers post advertisements looking for trading partners, and someone accepts their advertisement. Sellers can push ads to the platform for free, which buyers can then view. If the buyer like the terms of the deal, they can select the ad.
Another prominent feature of P2P exchanges is security. Once an ad is accepted, the platform acts as an escrow and locks the digital assets so that the funds are inaccessible to either party. After the buyer sends the fiat payment, the digital assets are unlocked and released to the buyer, ensuring that the seller can’t receive the fiat payment and then not send the crypto.
It’s understandable that centralized exchanges were the first engine to fuel cryptocurrency trading. In its inception, blockchain and cryptocurrency was a foreign concept. Centralized exchanges helped bridge the knowledge gap and provided a sense of familiarity with what was previously a very unfamiliar technology. However, now that knowledge surrounding the industry has increased, it’s clear that for the next wave of cryptocurrency adoption to materialize users need to distance themselves from these centralized entities and begin participating on more decentralized services like P2P exchanges.
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