Since its inception, Bitcoin has been often been lauded as a peer-to-peer system. By definition, a peer-to-peer system is one in which two or more computers share resources without the use of a centralized server.
In the case of Bitcoin, the resources that are shared are transaction data and the Bitcoin blockchain. So, is Bitcoin really a peer-to-peer system?.
The answer is both yes and no. While Bitcoin does use a decentralized network of nodes to share transaction data, it still relies on centralized exchanges for trading. This is because, in order for someone to buy or sell Bitcoins, they need to find a willing counterparty who is also looking to trade. There are no centralized exchanges for other peer-to-peer systems like file sharing (e.g.
BitTorrent) or communication (e.g. Skype). This means that, while Bitcoin is technically a peer-to-peer system, it is not fully decentralized.
This centralization of trading activity has led to some problems for Bitcoin. For example, centralized exchanges are often subject to hacks and theft. This was seen in 2014 when Mt.
Gox, then the largest Bitcoin exchange, was hacked and 850,000 Bitcoins were stolen (worth over $400 million at the time). If there were no central exchanges, then there would be no central point of failure for hackers to Target.
Another problem with centralization is that it gives too much power to those who control the exchanges. These individuals can manipulate prices by buying and selling large amounts of Bitcoins on their own exchange.
This is called “wash trading” and it artificially inflates the volume of trading activity on an exchange. This manipulation can lead to price bubbles and crashes, as we saw in 2017 when the price of Bitcoin soared to nearly $20,000 only to crash back down below $3,000 just a few months later.
So while Bitcoin is technically a peer-to-peer system, it is not fully decentralized due to its reliance on centralized exchanges. This centralization has led to some problems like hacks and theft at exchanges as well as manipulation of prices by those who control the exchanges.