- Is peer-to-peer Bitcoin Trading on the decline as regulations tighten their noose around these platforms?
This week, Paxful surpassed Localbitcoins as the peer-to-peer (P2P) crypto exchange which has the most volume, which is the first time ever that Localbitcoins has fallen from the #1 spot. However, this event has less to do with Paxful becoming successful, and more to do with the decay of the P2P crypto market in general. Indeed, the golden era of P2P crypto trading and Bitcoin dealers is long gone, and what remains of the market is being relentlessly eaten away by regulations and corporate competition.
In the early days of the crypto space, back before the altcoin boom of 2017, there was a flourishing P2P crypto market. The biggest hub for this type of trading was Localbitcoins, but smaller markets existed across the internet, such as on Bitcointalk and Reddit.
On these markets, crypto buyers and sellers would contact each other with phone or instant messaging, and would negotiate a price and then execute the transaction. Although this process was a lot slower, more expensive, and a lot more complex than using an exchange like Coinbase, it was still very popular because P2P crypto trading allowed users to maintain their anonymity, and also allowed users to avoid any potential account seizures or reversals. Indeed, Coinbase required the full identification information from every user, and often locked up accounts and reversed transactions, which discouraged countless customers.
The P2P crypto trade had two facets. Perhaps the most popular was in-person trading, where buyers and sellers met each other in real-life to complete transactions. The advantage of this is cash is totally anonymous and untraceable, and there’s little chance of being scammed when conducting a crypto trade in-person.
The other facet was online trading, where bank deposits, wire transfers, Venmo, PayPal, Square Cash, gift cards, reload packs like Vanilla and Moneypak, and any other payment method imaginable were used to transact cryptocurrency.
The P2P market was so lucrative that numerous people began to do crypto trading as a full-time job. These people were known as Bitcoin dealers, and they had a long list of clients who called and messaged them all day, and they were constantly doing online trades as well as running around town for in-person cash trades. Bitcoin dealers sometimes earned margins as low as 5%, but often earned 10-20%, and sometimes even 30-40%, so there was lots of money to be made.
The golden age of Bitcoin dealing stretched from 2013 to perhaps 2016, at which point regulators really cracked down on Bitcoin dealers. Laws were passed which required Bitcoin dealers to register as money transmitters and to obtain a money service business (MSB) license, which was a fairly impossible task since hundreds of thousands of US dollars is needed for the lawyers and reserves to get an MSB license.
Ultimately, these regulations effectively made Bitcoin dealing illegal, and law enforcement threw numerous Bitcoin dealers in prison for failing to comply with the laws. As the arrest tally mounted, Bitcoin dealers generally closed their businesses down to avoid being incarcerated.
Simultaneously, the number of crypto ATMs skyrocketed, and crypto ATMs were easier to use, perhaps more convenient in most cases, and charged lower fees than Bitcoin dealers. Wherever the crypto ATMs popped up Bitcoin dealers lost tons of business, and now there are crypto ATMs basically everywhere in the United States.
The regulations and the fierce competition of crypto ATMs have only increased to this day. Indeed, regulations have become so strict that Localbitcoins was forced to drop the in-person cash option, which is the only reason that Paxful overtook Localbitcoins.
Data from Coin Dance shows that peer to peer crypto trading climbed to a peak weekly volume of USD 130 million in late 2017, during the frenzy surrounding the Bitcoin rally to USD 20,000, and since then volume has been constantly dropping to as low as USD 23 million per week in March and USD 38 million per week as of this writing.
These stats don’t capture the full picture either, since Localbitcoins is now mostly unusable due to strict requirements, and practically no trading is happening anymore on Bitcointalk or Reddit.
There is little doubt that the decline of peer to peer crypto trading will only continue until there’s practically nothing left of the market, since governments have made it clear that regulations will only continue to get more strict, and crypto ATMs are popping up on every block. This is unfortunate for Bitcoin dealers, but perhaps all of this is necessary for the crypto space to complete its transformation from a Wild West into a mainstream financial industry.
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