Peer-to-Peer versus Regular Bitcoin Exchanges
Two types of bitcoin exchanges are in use: peer-to-peer and regular. On the one hand, there are the regular bitcoin exchanges, which use an order book to match buy and sell orders between people. However, neither the buyer nor the seller has any idea who the other party is, and this provides all users with a certain level of anonymity and privacy protection.
This is the most commonly used form of exchanging local currency to and from its digital counterpart in the form of bitcoin.
However, bitcoin was originally created to enable peer-to-peer transactions. Unlike other familiar peer-to-peer technologies you may be familiar with, such as torrent applications, in the bitcoin domain peer-to-peer means a one-on-one relationship.
A peer-to-peer transaction means that you have data related to the person or entity you’re interacting with at all times, rather than interacting with several different peers, as in the case of torrents. The information you have on that person can range from a bitcoin wallet address, to their forum username, location, IP address, or can even involve a face-to-face meeting.
Rather than using an order book to match up buy and sell orders — and thus controlling all the funds being used on the exchange platform itself — peer-to-peer exchanges match buyers and sellers without holding any funds during the trade.
For example, say you want to buy a bitcoin from someone who lives in the same city as you do. Rather than hoping to stumble across that person on a traditional exchange — chances of that are slim to none — you can initiate a peer-to-peer transfer with that individual.
There are several bitcoin platforms in existence that allow you to register an account in order to find other bitcoin enthusiasts in your local area. Some of the more popular platforms include Gemini.com for the U.S. market, whereas Bitstamp.net and Kraken.com offer facilities for customers in international markets subject to their individual policies and restrictions. You can check them out here:
That said, not everyone will be willing to meet up face-to-face. Some people prefer a payment by traditional means, such as a bank transfer or PayPal, rather than meet up for a cash transaction.
Depending on what kind of trading experience you prefer, peer-to-peer trading may be more suitable for your needs than the regular exchange. Generally, peer-to-peer trades do not require you to provide any documentation regarding your identity and offer a reputation system in order to track your own — and other users’ — trading history. In doing so, your chances of completing a trade successfully will only increase.
One of the most interesting aspects about peer-to-peer bitcoin exchanges is their built-in reputation system. Because you’re dealing with other traders directly, whose funds are not overseen by the platform owners themselves, the trust element is more important than ever before. It only makes sense to know a little bit more about traders’ previous history before going into business with them.