A Brief History
Bitcoin will be approaching its 11th year in January 2020. When the idea of a “peer-to-peer electronic cash system” was introduced by the mysterious Satoshi Nakamoto on the 3rd of January 2009, there was much speculation (or debate) as to how much a bitcoin would actually be worth.
For more than a full year (a year and 9 days to be exact), there were a lot of back-and-forths. It was then that a Bitcointalk forum user named “dwdollar” expressed the idea of opening the first-ever (and much-needed) bitcoin exchange saying: “I am trying to create a market where Bitcoins are treated as a commodity. People will be able to trade Bitcoins for dollars and speculate on the value. In theory, this will establish a real-time exchange rate so we will all have a clue what the current value of a Bitcoin is, compared to a dollar.”
The exchange went by the name of BitcoinMarket.com and it went live on March 17, 2010. Originally, it accepted PayPal as a means for paying for bitcoin with fiat. There were a lot of bugs and holes on the site. It was definitely a fixer-upper but the system worked and it gave people a viable way to buy bitcoin… at least it did for a while. As Bitcoin started to grow more popular, scammers started sprouting up like weeds on a nice clean lawn. Because of that and a stretch of trades with fraudulent natures, BitcoinMarket had to remove PayPal as a payment method on June 4, 2011, and its days were coming to an end.
Other bitcoin exchanges started opening and “deep web marketplaces” like Silk Road started stealing BitcoinMarket’s users away. In July 2011, BitcoinMarket’s successor, Mt. Gox, was launched and in early 2014, it handled around 70% of all bitcoin trades. Later that year, the exchange filed for bankruptcy as 850,000 bitcoins (approximately $450 million at that time), belonging to customers, went missing/were stolen straight out of the Mt. Gox hot wallet.
Digging Deeper
Bitcoin exchanges have evolved a lot over time—mainly, in terms of both efficiency and security. The first model, such as BitcoinMarket, can be classified as a “traditional bitcoin exchange.” In recent years, people have developed new ways to trade and one method that has been growing in popularity is the use of “peer-to-peer bitcoin marketplaces.”
Although these two kinds of platforms are used for the same reason—to buy and sell bitcoin—the systems that both platforms implement vastly differ.
Traditional bitcoin exchanges
Traditional bitcoin exchanges match buyers and sellers via order books. Once a buyer and a seller are matched, the platform acts as a middleman that helps carry on the trade. This helps the users achieve more anonymity as there is little to no interaction with one another and with the platform literally assisting both buyers and sellers, this type of bitcoin exchange attracts newbies more than the other. Bitcoin trading for beginners is made easy on this kind of platform; however, these platforms also have a set of cons. First and foremost, the helping hand traders get from the platform comes at a price. Traditional bitcoin exchanges often have higher fees, making it more expensive to trade. Some platforms will also require its users to link a bank account to the profile. This requirement may not be reasonable to all as there are still parts of the world that are either unbanked or underbanked. Not everyone has access to a bank account. Lastly, since traditional bitcoin exchanges are centralized, they are more susceptible to hacks and regulatory restrictions. An example that comes to mind is when China’s two biggest exchanges halted all bitcoin withdrawals for a month. As a result, the money of all the users was frozen in their wallets.
Peer-to-peer bitcoin marketplaces
On peer-to-peer bitcoin marketplaces, buyers and sellers are also matched via order book. However, the users are tasked to complete the trade themselves. This allows sellers to take multiple payment methods in exchange for their bitcoin. Peer-to-peer marketplaces have hundreds of different payment methods (such as bank transfers, gift cards, and even cash in person) and even allow their users to suggest new ones.
The ability of traders being able to interact with one another can be seen as giving up anonymity, but it also gives the users a more personalized trading experience—which can often lead to more cost-efficient trades and long-term business relationships. Buyers are given the ability to choose offers based on their preferences—payment method, fiat currency, and sometimes location. Sellers, on the other hand, are able to set preferences such as profit percentage, payment expiration, location, etc. Buyers and sellers can both create offers if they cannot find an offer, giving them an opportunity to find exactly what they are looking for.
Less popular payment methods mean higher profits for sellers. In the same way, some market prices are higher than others. These factors allow users to make money in many different ways. The peer-to-peer aspect also gives many different opportunities for real-life uses such as making payments, sending remittances, and wealth preservation.
Nevertheless, peer-to-peer marketplaces have a bad reputation for having a lot of scammers and/or rippers (people that rip the value off gift cards). Although that was the case for peer-to-peer marketplaces before, it certainly is not the case now. KYC/AML laws are being implemented more strictly as well as more specific security protocols such as escrow services, 2FA, and dedicated customer experience teams.
Your Trading Style
Neither type of exchange is better than the other. Each kind will have its own set of pros and cons to offer, you just have to decide which trading style will suit you more.
Question for students (and subscribers): Which trading style suits you more? A personalized one or an anonymous one? Please let us know in the comments section below this article.
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Historical Evidence
For more information, please see…
Thornton, Mike. History of Money: Financial History: From Barter to Bitcoin – An Overview of Our Economic History, Monetary System & Currency Crisis. CreateSpace Independent Publishing Platform, 2016.
The featured image in this article, a paper printable Bitcoin wallet consisting of one bitcoin address for receiving and the corresponding private key for spending, is licensed under the Expat License, sometimes known as the MIT License.
