P2P crypto exchanges have the widest reach, even though mainstream crypto exchanges such as Binance and Coinbase have millions of users. P2P crypto platforms have users from diverse parts of globe not served by mainstream exchanges.
P2P crypto exchanges are more prevalent in emerging markets than in other markets. Data from localbitcoins, the main P2P crypto exchange, shows high trade volumes are recorded in countries like South Africa, Nigeria, Venezuela, Nigeria, Kenya, Brazil, Colombia, China, India, Russia among others. These countries do not have mainstream adoption of crypto exchanges making P2P exchange platforms the best alternative.
Data from coin.dance analyzed by Cryptoslate shows that the largest market by volumes on localbitcoins is Russia, followed by US, China, UK, Nigeria, Venezuela, and Colombia among others. From Jan 1, 2017, to Oct 1, 2019, shows that 1.6 million bitcoins were traded on localbitcoins.
Sub-Saharan Africa, Latin America, and Eastern Europe have the highest growth rates on localbitcoins. On the other hand, trade volumes from Western Europe, New Zealand/Australia, Asia Pacific, and North American have remained consistent since mid-2018.
source: Matt Ahlborg
P2P exchanges work differently from other exchanges in that they match two people wanting to trade with one another. The price is not set by the platform but by the seller and buyers can choose from an array of sellers. Because the price is not set by the platform, there is always a difference in prices at P2P exchanges compared to other exchanges. The challenge and opportunity with P2P platforms like localbitcoins is that they can have large bid-ask spreads which can make it expensive for a buyer but good for sellers. This provides a good opportunity for holders to sell at a premium as demand increases. Data analysis from Matt Ahlborg suggests that most of the volume on P2P platforms is most likely not from speculation but for practical uses such as cross-border transfers and as an alternative to the deteriorating local currency. Nonetheless, speculation also makes a huge chunk of the volume especially in countries facing high regulatory backlash against use of cryptocurrencies.
P2P crypto marketplaces are living true to some of the ethos of bitcoin. Some of the major reasons for thriving p2p marketplaces are:
- Government crackdown on cryptocurrencies: No major emerging market has so far fully embraced bitcoin and cryptocurrencies in terms of giving clear regulation. This makes creating a non-P2P crypto exchange such as Coinbase, Binance, which need to be regulated and link to existing banking infrastructure difficult. After such bans, users usually turn to P2P platforms like localbitcoins because it is harder to regulate them since they are online marketplaces facilitating trade between parties instead of holding custody of users funds.
- Out of necessity: due to the above reason, individuals still need ways to get into crypto. Most emerging markets also have different financial infrastructure from western banking KYC requirements. Alternative trade channels exist underpinned by different payment methods such as mobile money that make trade between people efficient. P2P crypto trading is being facilitated by these payment systems in addition to normal bank transfers. Business-minded individuals can, therefore, set up trades on platforms like localbitcoins and sell to others enabling them to make income.
- P2P trading is a marketplace so sellers are able to customize to the payment methods available down to a specific country or even city. This is different from other exchanges where they have to navigate regulatory guidelines as money remittance services.
Depreciating local currencies
Countries with a high level of depreciating local currencies are most likely to turn to alternatives like bitcoin. However, it turns out that in most of such jurisdictions, crypto activities are usually banned. P2P platforms provide a lifeline. For example, data from Coin.dance shows a spike in trading of bitcoin against Argentine Peso in the week ending November 11 at around 19 million Pesos, the highest level recorded on localbitcoins for the country within a week. Cointelegraph reported that in Argentina Central Bank had banned bitcoin a week earlier. This is the same case from Venezuela
Argentine Peso has depreciated 85% against the US dollar in the past 5 years. Other countries that have depreciating local currency tend to use the US dollar for valuing goods and services. This has been the case in many countries when after central banks ban bitcoin, consumers look for alternatives, and OTC and P2P platforms are the first to record spikes in volumes.
Crypto P2P marketplaces do not exist in a vacuum; they are an extension of existing behaviors. If there is money to be made, it will be made. For some countries, it will be escaping the depreciating local currency and others it is trading and capitalizing on lack of other alternatives.
The current landscape
CEO of Localbitcoins recently said in an interview that the platform was receiving 4000-5000 new users per week translating to approximately 135,000 new users monthly. A competitor, Localcryptos, formerly, localethereum, has expanded from supporting only Ethereum and adding bitcoin. In a press release, they said that they intend to add more Ethereum-based tokens for trading in future. Localcryptos is relatively new joining two other older platforms: localbitcoins and Paxful.
There are more alternatives such as newly formed local.bitcoin.com (not to be confused with localbitcoins.com). It was started by bitcoin.com’s Roger Ver for trading bitcoin cash. Other alternatives are: Bisq, Hodl Hodl, Localcoinswap among others. You can view more on this Reddit post. The main point of convergence between different P2P platforms is KYC requirements, nature of wallets (custodial or not) and escrow terms.
Part of the initial appeal for P2P platforms was the lack of stringent KYC verifications. However, as these platforms gain more users they face more pressure to introduce KYC verifications. Localbitcoins in the last few months has started to mandate users to verify their identity in order to trade. It has also cut in-person cash trading.
P2P exchange trade volumes are still a drop in the ocean compared to mainstream exchanges. The future regulatory landscape in most of the emerging markets will determine the extent of growth of P2P crypto platforms. For now, they are serving as important pillars enabling access to bitcoin to diverse populations in different parts of the world based on individual needs.