A Beginner Guide to Understanding Traditional and P2P Cryptocurrency Exchanges

We get it—the thought of getting started with cryptocurrencies can be a little overwhelming. Buying and selling crypto can feel like a tricky process. After all, where should you even start if you want to buy crypto? And better yet, how can you decide which crypto exchange is right for you?

Don’t worry—the more information you arm yourself with, the easier the decision process will be. To help you get started, here’s everything you need to know about traditional exchanges and peer-to-peer (P2P) marketplaces.

What is a traditional exchange?

Traditional exchanges are one of the main ways to buy cryptocurrency. Even though they may feel like anything but traditional, they’ve been around for as long as crypto has. Hence, the term traditional exchanges. These exchanges have middlemen, called order books, that help the buyer and seller complete a transaction.

Order books are electronic lists that bring buy and sell offers to crypto customers. They also match the buyer and seller to each other. You can think of it as a crypto matchmaker. Due to the nature of order books, all you have to do is choose an offer you like and the order book will work with you to complete the trade. 

Like all things, there are benefits and drawbacks to using traditional exchanges, and it’s up to you to decide if the pros outweigh the cons.

Some of the pros of traditional exchanges include: 

  • Ease: Most of the time, traditional exchanges will link the customer’s bank account to their exchange trading account. This makes it easier for users to complete trades. 
  • Speed: Since there’s a middleman to help you along your trading journey, traditional exchanges tend to be quicker to use than P2P exchanges. Also, since they are typically linked to bank accounts, they allow for more seamless and faster trading.
  • Popularity: Since traditional crypto exchanges have been around for longer, they are more well-known than their counterparts. 

Some cons for traditional exchanges include:

  • Fees: There are fees associated with traditional and P2P exchanges. However, because order books are more hands-on with users, traditional exchanges tend to have higher fees. 
  • Accessibility: With traditional exchanges, there’s a lack of accessibility. Since these exchanges link trading accounts to a user’s bank account, traditional exchanges are primarily available to those in more developed regions with higher banking opportunities. Many people in unbanked and underbanked countries cannot use traditional exchanges.
  • Vulnerability: Traditional cryptocurrency exchanges are also open to being exploited by governments and regulations. For example, if a country were to freeze all crypto withdrawals for several months, users wouldn’t be able to access their funds until the restrictions are lifted. 

What is a P2P marketplace? 

A P2P or peer-to-peer marketplace is a decentralized platform where you can sell and buy cryptocurrencies with little to no third-party involvement. 

Here, users can choose from crypto deals that are available on the platform. Then when users decide to trade together, they agree on the terms. During the trade, crypto will be kept in escrow for safe-keeping. Escrow is a third-party service that holds onto crypto until the trade is completed. Once the payment has been confirmed, the crypto will be released from escrow and transferred into the user’s wallet.

To help you better understand how it works,  let’s break down the workings of a P2P marketplace with a real-life example. 

Let’s say Laura is looking to buy 100 USD worth of BTC from a P2P marketplace when she sees Jean’s active offer on the platform. Laura carefully looks into Jean’s offer terms and initiates a trade with her. During the trade, Jean’s BTC is held in escrow. Laura then sends her 100 USD payment to Jean. After Jean receives and confirms Laura’s payment, she then releases 100 USD worth of BTC from the escrow and sends it to Laura’s Bitcoin wallet.

While it may sound more complex than a traditional marketplace, P2P marketplaces are used by many traders for lots of good reasons. Some of the pros of P2P exchanges include: 

  • Flexibility: With P2P, users can pay with any form of payment a seller will accept, such as buying Bitcoin with gift cards, checks, or digital payments. There is literally no limit to P2P payment options. Keep in mind that sometimes traditional platforms will allow you to use credit and debit cards. 
  • Security: Over the years, escrow systems have become very secure, and nowadays, due to their third-party nature, they have allowed for a safer trading environment. Escrow systems help protect all trading parties involved, including the trading service. Since the exchanges themselves don’t hold crypto, users can conduct trades without worrying about anyone taking their funds. 
  • Fees: While P2P exchanges do have fees, they are typically less than traditional exchange fees. Since there is no actual “middleman” when using P2P, they only charge a third-party escrow fee. This means prices are typically pretty low.
  • Accessibility: P2P exchanges use more payment options and don’t require a bank account or direct bank transfer. Because of these reasons, peer-to-peer exchanges are more accessible to underbanked areas. Most P2P businesses require a smartphone and internet access to complete a trade. 

Some of the cons of P2P exchanges include: 

  • Speed: With P2P exchanges, trades may operate at a slower rate because there are no middlemen involved. Payment methods and the trading system aren’t as straightforward or streamlined without the matchmaker found in traditional methods.
  • Ease: P2P exchanges are also not as intuitive to use because there isn’t a middleman. While there are positives to doing things yourself, there may be a learning curve when you first use these exchanges.
  • Anonymity: These exchanges typically have less anonymity involved since you trade directly with other users. With P2P exchanges, there is also a built-in reputation system that shows other users how well you have traded in the past. 

The final benefit: inclusivity and freedom

There are many pros and cons for both P2P and traditional exchanges. However, we will say that P2P exchanges are more inclusive than their counterparts. After all, there are 1.7 billion unbanked people across the globe who have limited to no access to conventional banking systems. Those who have poor credit and are in debt due to high-interest rates may also struggle to use traditional exchanges. 

Lastly, there are certain countries where crypto is desperately needed since their own fiat currencies are highly inflated. P2P exchanges allow their users to access crypto easily. By using P2P you can help 1.7 billion people have better access to financial freedom and liberation, and what’s better than that?

Which exchange should I use? 

The beauty of cryptocurrency is the freedom it gives to its holders. Likewise, all traders are free to use whatever exchange they prefer. However, it’s essential to weigh out the pros and cons of each exchange and see which one is right for you. Whether you prefer a more traditional exchange or want to get your feet wet into something more novel, the choice is yours. Whatever you end up doing, keep in mind the ripple effects your choices have on the world around you. 

*The content of this article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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