What are Peer To Peer Bitcoin Exchanges and Why Should I Care?

What is Peer to Peer?
The term, Peer to Peer, or P2P has been around for a while. P2P became popular in 1999 with the introduction of Napster. Essentially, Napster was a file sharing application and a set of central servers that linked people who had files with those with requested files. The central index server indexed the users and their shared content. In Napster case, the shared content was music. When someone searched for a file, the server searched all available copies of that file and presented them to the user. The files would be transferred directly between the two private computers. Because this process occurred on a central server, however, Napster was held liable for copyright infringement and shut down in July 2001.

The concept of P2P did not die with Napster’s collapse. P2P now implies that you are connecting directly with other computers and, in the case of P2P Bitcoin Exchanges, Bitcoin (BTC) owners, to share digital content. There is no central server, just distributed “nodes” sharing information and files.

How does a “regular Bitcoin Exchange work?”
In a nutshell, a regular exchange sets a price for the purchase of their own stock of BTC. Then, they take your fiat money or other cryptocurrencies and exchange it for BTC at their current rate. Some accept Credit Cards to do this (Coinbase is one), others do not. Often, the purchaser is required to provide identification to prove they are who they say they are before the transaction will execute. Once executed, the BTC is placed in the purchaser’s Wallet, either on their Exchange or externally.

How does a P2P Exchange work?
P2P different. P2P Exchanges match Buyers with Bitcoin Sellers. These are individuals trading back and forth with other individuals. Essentially, the sellers are setting their own price and what types of payments they will accept. Many accept PayPal, Bank Transfers, Credit Cards and even cold, hard cash. The Exchange acts more like a dating service, matching people interested in trading cryptocurrency. Of course, they take a small fee for this matchmaking service.

Who are the key P2P Exchange players?
1. LocalBitCoins
2. Xcoins
There are probably others, but these are the two of the biggest and most trusted, with LocalBitcoins as the leader. Each have their pros and cons.

For this article, I’ll discuss LocalBitCoins.

From their website, LocalBitCoins stresses that people from different countries can exchange their local currency to bitcoins. Users can post advertisements where they specify their exchange rate and payment methods for buying or selling bitcoins.

To conduct the actual trade, you have two options — Over the Counter (OTC) transactions where Buyers and Sellers exchange money and Bitcoin face-to-face OR conducting the trade completely online.

OTC or face-to-face meetings happen outside of the LocalBitCoin environment and are not controlled. Users tend to meet in coffee shops or other public places, exchange cash or other accepted payment methods (there are currently over 60+ payment methods) and then the Seller would transfer his/her Bitcoin to the Buyer’s Bitcoin wallet address.

Pros of using LocalBitcons
• Can use Cash or essentially any payment method the seller is willing to accept (Cash if choosing the OTC method)
• Buyer can “see” the person with whom he/she is doing business (if choosing the OTC method)
• Transaction is free of any additional fees, taxes or other watchful eyes of government agents or other persons (fees are charged for the Advertisement and technically, all transactions — both online and OTC are “reportable” for US Tax purposes)
• Can possibly get better pricing than current market rates, depending on motivation of Seller, terms of the trade, etc.
• LocalBitcoins is de-centralized, embracing the nature of bitcoin, unlike centralized Exchange companies
• Your trade is with an actual person

  • Online transactions are fast and safe as Bitcoins are protected in escrow accounts
  • You receive your Bitcoin instantly -upon receipt of payment using the online purchase method

Cons
• Limited security for OTC transactions
• Possibility the Seller will no move Bitcoin to the Buyer’s wallet for OTC transactions
• Local meet-up may be inconvenient if the two parties do not live /work close to each other (if choosing the OTC method)
• OTC transactions are not automated and can take time to coordinate 
• Your trade is with an actual person
• For OTC trades, it is possible counterfeit money is used

Cash transactions are face-to-face, Buyer and Seller. Both online and OTC transactions are initiated by the Buyer responding to an advertisement from a seller, but the entirety of the sale for OTC transactions are conducted on-line.

For on-line purchases, the Seller first places the Bitcoin in an escrow account, which he/she cannot touch. Once the Buyer makes the agreed upon payment, the LocalBitcoins releases the Bitcoin directly to the Buyer’s Bitcoin wallet address. If the Seller for some reason tries to scam the Buyer on an on-line transaction and does not release the Bitcoins to the Buyer, LocalBitcoins can release the Bitcoins from escrow. This is not available for local OTC transactions.

Is it possible to buy less than One (1) Bitcoin?

Yes. In each advertisement, the seller has entered a “limit.” It lists the least and most number of Bitcoins that can be purchased from that advertisement.
One Bitcoin can be divided into smaller pieces, the smallest piece is called one satoshi and is the same as 0.00000001 BTC (worthless for all practical purpose, but an interesting fact, non-the-less).

What Payment Options are Available?
Cash Deposits, Bank Transfers, Mobile Payments, Credit and Debit Cards, PayPal, Gift Card codes and 50+ others

It seems transaction fees for Credit, Debit and PayPal transactions are high. Why?
Bitcoin transactions are irreversible, most traditional payment methods can be charged back. This creates risk for the person selling the Bitcoins, as PayPal or a bank can take the money someone paid him out of his account after he has sent away the Bitcoins. That is why traders need to have a high price for certain payment methods as they are protecting themselves against this risk. 
It is recommended to get the best price to pay using a hard to reverse payment method, such as Cash Deposit, bank transfers and mobile payments. When you search to buy Bitcoins, select All online offers as a payment method and you will see offers for all payment methods and you can choose one that is convenient for you and offers a better price.

How do I receive my Bitcoin once my purchase is complete?
The Bitcoins will be deposited into your LocalBitcoins Wallet. To see this address, you need to go to visit the Wallet page. The top of the page is divided in two parts allowing Bitcoins to be both sent and received. On the right-hand side is the receiving address (Wallet). Note that the receiving address changes after each transaction. This is done to protect privacy, making it difficult for someone to track the Bitcoin transactions. Old addresses still work, but it is not recommended that they are used.

Once you know your LocalBitcoins.com receiving address, you can go to your other Bitcoin wallet and use this address to send Bitcoins to your LocalBitcoins address.

Also, the minimum can be send to a LocalBitcoins wallet is 0.0002 BTC. Bitcoin deposits less than that are not processed.

Transactions take between 10–60 minutes when sending Bitcoins to a LocalBitcoins Wallet or when sending Bitcoins out from a LocalBitcoins Wallet. Transactions between LocalBitcoins Wallets is instantaneous.

Can I sent my Bitcoins to my External Wallet or a Merchant’s Bitcoin Wallet Address?
Bitcoins will appear in your LocalBitcoins Wallet. From there you can easily send the Bitcoins to other Bitcoin addresses. Most Bitcoin services are compatible with each other, the same Bitcoins you buy from LocalBitcoins will work in your favorite online stores that accept Bitcoin, and also in local shops that accept Bitcoin.

To use your LocalBitcoins Wallet enter the receiving address, amount and your two-factor authentication code (if you have 2FA enabled) and click Send as shown in the screenshot below.

Sending Bitcoins using LocalBitcoins

What happens when I pay, and the seller doesn’t give me my Bitcoins?

As mentioned before, all online trades are protected with escrow to prevent this from happening. When the trade is started, the Bitcoin amount for the trade is taken from the seller’s wallet and is held by LocalBitcoins for the entire time of the trade. If the Seller is trying to scam, the Buyer can open a dispute on the trade. LocalBitcoins will investigate the situation and after verifying proof of payment, will transfer the Bitcoins to the Buyer’s wallet.

Must a phone number be provided before I canbuy Bitcoins?
No. Bitcoins can be purchased without one, but advertisements will be limited. Verifying a phone number with LocalBitcoins increases the number of advertisements that can be contacted.

Must my ID be verified before I can buy Bitcoins?
Bitcoins can be purcahsed without verifying an ID. However, many traders do require the Buyter to perform an ID verification before buying, though this requirement does change from country to country and trader to trader. 
Verifying an ID gets the Buyer access to many more advertisements and better prices.

OK, How Do I Buy?
Step 1.
Register an account with LocalBitcoins to get a free and secure online bitcoin wallet. No additional apps are needed. If you already have an account, skip to the next step.
Please use my referral link to access LocalBitcoins! 😊

US Residents can click HERE to link directly to the US trading area of the system.

Step 2.
Go to the main page and in the search box fill in the form with the amount you want to buy in your currency, your location and choose a payment method. If you’re unsure how you want to pay, choose “All online offers” as your payment method. The site will list bitcoin traders available in your region.

Choosing your currency and trading location

Step 3.
From the list of advertisements, choose one from a trader with a good reputation score and a high amount of trades. The response time indicator shows if a trader replies within five minutes (green), within 30 minutes (yellow) or slower than 30 minutes (grey). You can click the ‘Buy’ button to view more information about an advertisement.

Buy Bitcoins Information Screen

Step 4.
After you press the ‘Buy’ button you’ll see more information about the advertisement, including the terms of the trade. Read through them before submitting the trade request, if you don’t agree with them you can go back to the previous page and choose another advertisement.

To start the trade, type in the blue box how much you want to buy, enter a message for the seller and click the Send trade request button to the start the trade. Be sure you’re ready to pay when clicking the button, if you don’t pay before the payment window is over, the trade will be automatically cancelled.

Messaging a Seller and Payment Screens

Here is a quick video from LocalBitcons on the overall process:

LocalBitcoins Overview

Wrap Up and Why You Should Care

LocalBitcoins is arguably the leading P2P Bitcoin trading platform with over 1,000,000 registered users from 249 countries using over 60+ payment methods. With LocalBitcoin, trades for Bitcoins can be accomplished using traditional currencies through person-to-person trades. Some prefer to buy and sell Bitcoins using face-to-face meetings because it allows for fast transactions and more diverse payment methods. Centralized bitcoin exchanges are slow and cumbersome, trading directly with other people using the same payment provider makes the money move much faster.

The bottom line is that LocalBitcoins is a trusted method for purchasing Bitcoin using the widest variety of payment methods with a minimal requirements for Identify Verification.

Part II of this review will be of Xcoin — a basic competitor to LocalBitcoins with one difference: Bitcoin is “lent” to “borrowers” from individuals who are “loaning” the coins out for a fee. I put quotes around the terms because, although they mention these are loans, there really is never any intention of the borrower returning the Bitcoin and receiving his/her money back. The principal and interest (fees) were paid up-front before the Bitcoin was released to the borrowers Wallet. There is no need to return the coin. The borrower pays using multiple payment methods to receive Bitcoin and the lender got a good price for the loan/sale of his/her Bitcoin.

I hope you enjoyed the guide and Happy Trading!