Peer-to-peer (P2P) trading is becoming increasingly popular among cryptocurrency traders, but like any type of trading, it carries potential risks. Being aware of these risks allows operators to protect themselves from potential losses and better understand the process. There are numerous precautions they can take; read on to discover what they are, as well as how and when to apply them.
Introduction
Peer-to-peer (P2P) cryptocurrency trading involves buying and selling digital currencies without the need for an external intermediary. P2P trading allows buyers and sellers to set their prices, choose their trading partners, and decide when to execute transactions. It also enables diligent and experienced operators to seek and take advantage of favorable trading conditions that suit their needs.
P2P crypto markets facilitate the direct exchange of cryptocurrencies between individual users. There is no central authority or third-party intermediary, giving users more control over their funds and allowing them to protect their identity during transactions.
Despite these benefits, there are also risks involved in P2P trading that every user must keep in mind before deciding to try it. Common risks faced by traders include fake payment proofs, chargeback fraud, incorrect transfers, man-in-the-middle attacks, triangulation scams, and phishing.
Is P2P trading safe?
As with any type of trading, P2P trading has a good amount of risks that vary depending on the exchange and its security measures. While older exchanges faced a higher risk of theft and scams, many newer P2P trading platforms have significantly improved their security measures.
For example, a leading P2P exchange today often has an escrow service, regular security updates, and a strict identity verification process (among other measures) to keep users safe.
However, even with the proper safeguards, all trading activities carry risks, and P2P trading is no exception.
What are some common P2P scams?
Fake payment receipt or SMS
Scammers can digitally alter receipts to convince you that they have sent payment and trick you into delivering cryptocurrency. An example is the SMS scam where criminals spoof a text message to notify the victim that they have received a payment.
How to avoid this scam: As a seller, you should only approve the transaction after verifying whether the payment is already in your wallet or bank account.
Chargeback fraud
A bad actor may utilize a chargeback feature on the chosen payment platform to reverse your payment after receiving your assets. In many cases, they attempt to pay through a third-party account. Some payment methods, such as checks and online wallets, allow for easier chargeback requests.
How to avoid this scam: Never accept payments from third-party accounts. If this happens, file an appeal with the platform and initiate a refund to the buyer's account.
incorrect transfer
Just like with chargeback fraud, a scammer may try to steal your assets by contacting their bank to report an erroneous transaction and request a reversal. Some scammers may even pressure you not to report the incident using fear tactics, such as warning you that selling cryptocurrency is illegal.
How to avoid this scam: Do not be intimidated by fear tactics. Systematically gather evidence, such as screenshots, of your correspondence and transaction with the criminal.
Man-in-the-middle attacks
In a man-in-the-middle attack, a bad actor inserts themselves between a user and an application, organization, or another individual and communicates on behalf of that counterpart to steal assets or sensitive information such as private keys. The three main categories of man-in-the-middle attacks include romance, investment, and e-commerce scams.
Romance scam. In this scenario, a scammer pretends to forge an online relationship with their victim. Once they have earned the victim's trust, they manipulate them into helping with their financial problems, sending them money or cryptocurrency, or sharing sensitive information such as private keys, only to cut off all contact once they have achieved their malicious goals.
Investment scam. An investment scam involves a criminal approaching and successfully convincing their victim to invest in a particular company. By being the "middleman" between the victim and the investment opportunity, the scammer can direct the user's funds wherever they wish under the pretense of "investing" them.
E-commerce scam. An e-commerce scam involves a scammer posing as an online seller offering desirable items at discounted prices. They insist that their victims make payments in cryptocurrency to their wallets, and once this is done, they disappear without providing the products they had promised.
How to avoid this scam: do not respond to trading requests on any social media platform. Limit your communication with your counterpart to the official platform before and during a transaction.
Triangulation scams
A triangulation scam involves two criminals taking two orders from the same seller almost simultaneously, which ultimately confuses the seller into releasing more cryptocurrency than they have paid.
For example, Buyer A accepts an order worth 5000 BUSD in cryptocurrencies (Order A), while Buyer B accepts an order worth the equivalent of 6000 BUSD (Order B).
Then, Buyer B transfers 5000 BUSD to the seller, while Buyer A marks Order A as paid. The seller then delivers the cryptocurrency to Buyer A, thereby completing Order A for 5000 BUSD. Buyer B sends another 1000 BUSD to the seller, provides a payment receipt for the 5000 BUSD received from Buyer A plus 1000 BUSD, and compels the seller to release the digital assets under Order B.
When the dust settles, it turns out the seller has released 5,000 + 6,000 = 11,000 BUSD in cryptocurrencies but has only been paid 6,000 BUSD.
How to avoid this scam: Always make sure to check your bank account or wallet to confirm that you have received full payments for all pending P2P transactions.
Identity theft
Phishing is a type of malicious attack in which a scammer uses a fake profile to deceive users into sending them assets or information. For example, a bad actor may impersonate a customer service representative of a P2P platform to gain access to private information or cryptocurrency accounts.
How to avoid this scam: Some scammers may send fake security alerts about your account via email or text message. When reviewing messages, do not click on unknown links before you have verified the source. You should also seek help only from the official P2P exchange.
How to identify risks
Before negotiating
Check P2P advertising profiles. Evaluate potential trading candidates before initiating a transaction with any of them. Some things to consider when looking at a P2P profile include:
Number of transactions: low numbers are not necessarily bad, but a high number of completed transactions can be a sign of a trustworthy P2P party.
Completion rate: reconsider if it is below 80%, as this may indicate that the trader has a habit of backing out of transactions.
Trader or user feedback: very few positive reviews or many negative reviews can indicate a higher trading risk.
Review the ads carefully. Evaluate each P2P ad to determine if it meets your needs and goals. Consider the price, quantity, accepted payment methods, restrictions (such as trading limits), and other terms and conditions. For example, a too-great disparity between the P2P price and the market price on other trading platforms is suspicious.
When negotiating
Stay alert when interacting with a P2P buyer. Red flags include:
The buyer pressures you to release the cryptocurrency.
The buyer requests unnecessary information.
The buyer stops responding.
The buyer asks you for a loan.
The buyer paying less than the agreed amount in the order.
The buyer pays more than the agreed amount in the order.
The buyer requests to communicate outside the P2P platform.
The buyer requests payment through a third party.
Stay alert when interacting with a P2P seller. Red flags include:
The seller asks you to cancel the order after you have already paid.
The seller requests to communicate outside the P2P platform.
The seller asks you to operate outside the P2P platform.
The seller asks you to pay an additional fee.
After trading
When interacting with a P2P buyer, red flags include:
I haven't received the asset for which you paid.
Receive a bounced check from a buyer.
Your bank account gets blocked after receiving payment from a buyer.
The buyer initiates a chargeback through their bank after you have transferred your cryptocurrency to them.
General tips for protecting against scams
Trade on accredited platforms
Choose leading P2P platforms that offer their users robust security features. Common features include:
Risk management features. A platform that imposes specific requirements before buying or selling can help reduce inactive, unreliable, or low-quality ads. Better yet, there should be sophisticated order comparison logic to connect users with trustworthy and only verified traders, as well as risk management algorithms to monitor suspicious activities.
Some algorithms are even optimized to limit the trading activities of potential bad actors. Additionally, limits or delays on withdrawals can help protect user funds.
Know Your Customer (KYC) protocols. P2P platforms with KYC protocols can help beginners find trustworthy trading partners by requiring user identity verification. This allows beginners to trade with verified traders who have a proven track record and reliable sources of funds.
Escrow services. Escrow services provide a secure way for buyers and sellers to exchange goods or assets. A trusted third party (usually the P2P platform) manages the exchange of funds between the parties transacting to maintain security and fair trading.
Customer support. Although P2P trading generally operates without intermediaries, the customer support team of a P2P platform can step in if a user faces issues with a trade.
Automated payment. New automated payment methods allow P2P platforms to automatically process the release of cryptocurrencies held in escrow without manual intervention. Buyers can receive their newly acquired assets instantly, and sellers do not have to verify the payment of each order or manually release the assets.
Blocking feature. The blocking feature allows you to block suspicious users: if you have had an unpleasant experience with someone, you can block that user and prevent them from trading with you again.
Communicate only on the platform.
Avoid contacting potential trading counterparts on dubious websites and stay alert for prices that seem too good to be true. Additionally, communicating using external channels will make it easier for a scammer to file a false dispute against you and deny that the transaction took place.
Double-check your transactions
Remember to verify all counterpart information when conducting transactions with a peer. Review all receipts and transactions to ensure nothing has been digitally altered. Here are some tips to identify a fake payment receipt:
Overlaid text
Different colors
different typography
Size difference
You can also use a free online image forensics tool. Search for "fake image detector" or "manipulated image forensics tool" to get an idea of what is available.
Take screenshots
Keep records of all communication and transaction evidence in case you need to file an appeal.
Have targeted ads
If you have an established crypto network, ensure that your ad only reaches the people you want to trade with. Hide your ad and share it only with specific people; they can be people you know and trust or users you have successfully dealt with before. Hiding ads can also be useful if you want to conduct a significant transaction.
Block suspicious parties
Proactively block users with whom you have conducted suboptimal trades to protect yourself from fraud or other behavior that may affect your trading experience.
File an appeal
If you have any issues, seek customer support and open an appeal. Remember to provide all relevant evidence regarding your transaction so that customer support can assist you better.
Conclusion
To protect your assets, it is essential to stay alert to the potential risks associated with P2P transactions. This includes understanding the terms and conditions of any agreement, staying alert for red flags, and using platforms with strong security features.
Be cautious when conducting any P2P transaction and contact customer service if you have any concerns. If you remain aware and take the necessary precautions, you will be able to fully enjoy the benefits of P2P transactions.
