LocalBitcoins Ends Service: What’s Next for P2P Crypto Exchanges?

Why Did LocalBitcoins Shut Down?

The exchange cited “challenges during the ongoing very cold crypto winter.” But its woes began long before 2022’s frosty market conditions.

As a Bitcoin-only exchange, it meant that when the market took a beating, it did too. This is unlike other exchanges such as Coinbase and Binance — which support hundreds of currencies, spreading risk.

LocalBTC lost significant trading volume since its heyday of 2017, when it averaged approximately $100 million worth of BTC weekly trades. But things began to spiral in early 2021 when weekly trading volume dropped to 1,000 BTC, never to recover.

Events on the global political stage also contributed to LocalBitcoins’ demise. One such event is the Russia-Ukraine war. The exchange’s highest trading traffic once came from Russia, at 17.4% of its overall volume. But in the wake of Northern Asia’s invasion of Ukraine and international sanctions levied against it, the exchange’s leadership had to lock out Russian traffic in an unavoidable but financially adverse move.

A Legacy of Economic Revolution

While not a towering presence in the exchange scene, LocalBitcoins played a pivotal role in the evolution of Bitcoin’s economy. It pioneered P2P Bitcoin trading — a service that allows users to buy and sell Bitcoin directly from one another without the intervention of a third party.

P2P trading is a crucial element of Bitcoin trading because it embodies Bitcoin’s founding philosophy of “peer-to-peer” transactions that the currency’s founder(s), Satoshi Nakamoto, envisioned.

It’s this P2P component that made LocalBitcoins an attractive exchange for citizens of countries with economic “peculiarities.” Per a 2020 blog post by the company, Russia, Colombia, and Venezuela were its “main markets” — making up 41% of its trading volume. Countries such as the UK, Nigeria, China, and Brazil also brought significant volume.

For the nationals of some of these countries, Bitcoin is not a luxury. Indeed it’s a life or death affair, sometimes literally, per this anonymous essay for the Foundation for Economic Freedom. As detailed in it and other examples, the leading cryptocurrency has been a lifeline for Venezuelans amid a collapsing national currency.

Also, Bitcoin can help citizens of countries such as Nigeria and Russia, which have instituted capital controls, circumvent them. This is an example of how such a process would take place per research by three professors in the case of China’s capital controls:

(i) buy Bitcoin at a domestic Bitcoin exchange in CNY (Chinese Yuan),

(ii) transfer the Bitcoin to an overseas Bitcoin exchange via the Bitcoin blockchain, and

(iii) sell the Bitcoin at a foreign exchange in USD then withdraw the USD from the foreign Bitcoin exchange.

According to the study, this “strategy” would bypass the $50,000 per year individual overseas transaction limits.

Bringing Bitcoin Everywhere

LocalBitcoins’ slogan was “Bringing Bitcoin Everywhere.” For its users everywhere, that wasn’t another gimmicky tagline but a true reflection of their reality using the exchange.

For instance, the exchange’s users could buy and sell Bitcoin and receive payment instantly thanks to its support of grassroots-level payment channels such as Mpesa and Chipper Cash in Africa. This feature made selling BTC on the exchange seamless.

Let’s say you needed to sell Bitcoin and receive payment via Mpesa. All you had to do was identify an interesting offer, initiate a trade, and give the buyer your phone number. Depending on whether they’re online or using Mpesa or how fast their bank works, you could expect to receive payment in two to fifteen minutes.

As a fiat off-ramp, LocalBitcoins’ integration of grassroots payment methods was a game changer and a step further in bringing Bitcoin close to the common folk.

This matters because, due to most African central banks’ ambiguous or unfriendly Bitcoin stance, most local banks are often reluctant to accept deposits from crypto exchanges or process crypto-related transactions.

Lessons From LocalBitcoins

If there’s a lesson to be learned from LocalBitcoins’ closure, a crypto exchange must offer more to remain competitive in a rapidly evolving environment. While offering just Bitcoin trading services is what’s idealistic, it’s no longer enough.

The Finnish exchange came on the scene in 2012 — when Bitcoin finished at a humble $13 and the crypto industry was still in its infancy. Those days are a far cry from the asset’s now record high of nearly $70,000, demonstrating the industry’s explosive growth over the years.

Today, tens of thousands of cryptocurrencies exist. And although Bitcoin maximalists have branded them shitcoins, some of them have proven compelling to be taken seriously enough. From stablecoins to privacy coins to governance tokens, several categories of cryptocurrencies have surfaced that provide utility to the community.

The crazy proliferation of cryptocurrencies and their divergent use cases, both demonstrate the highly dynamic nature of the space and how a business must adapt to stay in the game.

Closing Thoughts: LocalBitcoins Leaves a Powerful Legacy

It’s the end of an era for the groundbreaking exchange – LocalBitcoins. While users will miss its simple yet effective style, they can take consolation in the fact that several other exchanges (including LocalCoinSwap, Binance P2P, Paxful) support P2P trading of their favorite currency that it spearheaded.

Maybe LocalBitcoins will re-calibrate and come back one day. Perhaps it won’t. Either way, its legacy and impact will live on. To echo its parting shot, history cannot be rewritten.