In the expanding cryptocurrency industry, users have several options for purchasing, selling, staking, and exchanging their digital assets. Cryptocurrency exchanges and cryptocurrency brokerages are the most popular methods. Although they have many similarities, they differ greatly. A crypto brokerage facilitates indirect trading by mediating between the customer and the market. Crypto exchanges also provide an intermediary service, but only between traders. There is more to it, however.
The purpose of this article is to explain what cryptocurrency brokerages and cryptocurrency exchanges are, their pros and cons, and how to distinguish them. Hopefully, by the end of this article, we will be able to help you find the ideal option that will suit your trading needs.
How do crypto brokers work?
In the same way as traditional brokers, cryptocurrency brokers act as a conduit between traders and the cryptocurrency market, facilitating the purchase and sale of cryptocurrencies. A crypto broker may be an individual, a platform, or a business. Sometimes, cryptocurrency brokers provide traders with derivative products, thereby allowing them to engage in trading contracts on the value of cryptocurrency.
Various derivatives containing cryptocurrencies exist, including cryptocurrency futures, crypto options, and contracts for difference (CFDs).
Crypto brokerages offer two methods of increasing profits: trading rate fluctuations and investing. In spite of this, volatility trading remains one of the most popular approaches.
The use of CFDs is an alternative to trading Bitcoin, altcoins, or any other crypto asset. In a contract for difference (CFD), two parties agree to trade based on a difference in valuations of assets. In such types of contracts, the underlying asset's value is determined by the difference between the completion time of the contract and the ultimate close of the trade.
Even though CFDs are similar to contract agreements, they have several significant differences. CFDs do not require the seller to own specific assets. Sellers here usually give buyers the difference in price between when they open and when they close a position if the price of the asset increases between the two times. In the case of a price decline, buyers compensate sellers.
Crypto brokers allow traders to exchange CFD contracts. When we buy Bitcoin, for example, we enter into a CFD with the broker, agreeing that if its value rises, the profit will be ours. A fall in BTC's value, however, will result in a loss of funds.
As a matter of fact, a crypto broker does not actually sell us BTC or any other cryptocurrency assets when we trade CFDs.
As an example, imagine that you open an account with a cryptocurrency broker and deposit 1,000 USD so that you can sell Bitcoins through it. Your profit comes from the difference in the price at which you withdraw from the trade if the BTC price drops. If the price has dropped from 1,000 USD to 600 USD, you will be able to make a 400 USD profit based on that difference.
In our next section, we'll explore the pros and cons of crypto brokers:
- Cryptocurrencies can be traded in a variety of ways besides CFDs;
- Depositing and withdrawing is comfortable and easy. A debit card or a credit card can be used by the trader without any hassle;
- The possibility of using copy trading or any other similar services;
- Most crypto brokers are regulated and controlled by financial authorities, making it impossible for them to avoid laws;
- There is usually 24-hour client support available to clients.
- A cryptocurrency broker's biggest downside is charges and fees: sometimes they can be expensive;
- Cryptocurrency is currently plagued by unreliable, even fake brokers who are merely scammers or shady businessmen who are just out to make a quick buck. Traders should be careful and choose wisely so as not to fall victim to fraud;
- Having no direct access to cryptocurrencies;
- Coin pairs are limited.
Now that we have a better understanding of cryptocurrency brokers let's explore cryptocurrency exchanges.
What is a cryptocurrency exchange?
Providing crypto-to-crypto and crypto-to-fiat pairs is the primary function of cryptocurrency exchanges. The majority of exchanges that deal with cryptocurrencies do not offer CFD trading. In a nutshell, it means you don't receive the difference between buying and selling BTC. Crypto exchanges allow you to sell Bitcoin directly and earn money for buying it at a lower price and selling it at a higher.
Cryptocurrency brokers and crypto exchanges are fundamentally different from one another in that exchanges provide a significantly wider scope of cryptocurrencies and other digital assets. You can usually transfer funds either from your crypto wallet or from your debit/credit card instantly, thanks to the ease of digital transactions. If you want to make a deposit, you can do so either with fiat money or with cryptocurrency.
It's worth mentioning that since crypto exchanges are growing, they're adding new features to attract clients. The majority of well-known cryptocurrency exchanges, including Binance, Crypto.com, and others, provide instruments such as DeFi, multiple tokens, contests, NFTs, stakes, and many more.
Most brokers offer multiple investment options, and crypto exchanges are starting to do it too. One of the options they provide is staking. A staking transaction involves investors donating a particular cryptocurrency asset to a blockchain project in return for some rewards.
These are some of the most common benefits and drawbacks of crypto exchanges:
- Trading cryptocurrencies directly is possible. Exchanges allow users to trade crypto for another crypto or fiat without receiving the price difference.
- There is a huge selection of crypto assets. Traders have a much greater choice when it comes to choosing a token or a coin when dealing with exchanges. Additionally, exchanges are constantly adding new assets to their offering list to ensure they remain competitive.
- A new generation of cryptocurrency exchanges is emerging, offering other trading instruments like futures.
- There are a number of crypto exchanges that offer assets that can reduce the costs of trading. This makes trading such assets cost-effective.
- Depending on their services and convenience, centralized crypto exchanges may charge higher transaction fees. It could certainly be costly, especially when dealing with larger volumes.
- Cryptocurrency exchanges take full responsibility for the money of their clients. Their handling of transactions with potentially large sums makes them an attractive target for hackers.
- Additionally, crypto exchanges are typically unregulated. However, over time, it appears that major exchanges are finding ways to operate legally in particular jurisdictions.
With more information about crypto brokerages and crypto exchanges, let's examine their main differences.
Crypto exchanges and crypto brokers: what's the difference?
- The regulatory environment and cyber threats
Cyberattacks against cryptocurrency exchanges remain commonplace today. While cryptocurrency brokers' systems aren't immune to hacking, their security system is much more robust, and they are regulated by regulatory bodies. Furthermore, authorities warn consumers constantly about crypto scams available online.
A number of crypto exchanges have been hacked recently, including KuCoin, Mt.Gox, and several others. Even many major cryptocurrency platforms, including Binance, are frequently targeted by cybercriminals, who are trying to break into their KYC databases, websites, and many other aspects of their operations.
Conversely, brokers are governed by the authorities, which means you are basically working with funds protected by government watchdogs like the US Securities and Exchange Commission.
- Process of registration and validation
Exchanges all have their own procedures. There are some that just require signing up with a legitimate email address, verifying it, and setting up passwords. Exchanges that use fiat currency, particularly the more advanced ones, require valid authentication. If you wish to get access to the crypto exchange, you may be required to have a video chat with an exchange representative or to send a photo of you holding your ID. Additionally, if a trader wishes to make a large deposit, then he or she must go through a full KYC process in order to complete the transaction successfully.
You may need to wait up to two days for verification to complete. In times of exponential growth, when millions want to join the hype, the exchange might be unable to accommodate new accounts due to high interest and capacity limitations.
Brokers, like cryptocurrency exchanges, offer a similar account opening process; however, they have stricter conditions to follow. Considering the broker has to follow state regulations, you can't proceed without authentication. To register, an individual must show identification and provide evidence of their address, like a utility bill, bank statement, or rent bill.
When compared to an exchange, verification is usually faster with brokers. Once the trader's account has been verified, the trader can deposit money and begin trading.
- Withdrawal and deposit procedures
When it comes to depositing or withdrawing money from a crypto exchange, you have two options. It is common for debit or credit cards, as well as bank accounts, to be charged fees. Because of this, using fiat can be a hassle. Also, be aware that some exchanges do not accept fiat currencies at all. Cryptocurrencies are, therefore, the best way to deposit.
Furthermore, withdrawal fees often exceed those for deposits. Since not every bank accepts transfers from crypto exchanges, ensure yours will.
By using a cryptocurrency broker, you can take advantage of additional benefits. There are no restrictions on what you can use, either a bank account, credit card, or e-wallet. Some brokers even allow crypto transfers. In addition, there are no high commissions associated with the withdrawal of funds. 3% is the maximum amount these fees can be.
What is the best choice for you?
As a first step, determine what currencies you want to trade with and whether you are interested in trading many cryptocurrencies. Often, commissions and fees are simplified on exchanges, and cryptocurrency trading is more affordable.
There are a lot of crypto exchanges on the market that offer fee reduction strategies and extra revenue opportunities. A common feature offered by the most advanced exchanges is staking, which often attracts new clients to the exchange.
Alternatively, you can consider a cryptocurrency broker that offers derivative products, allowing traders to engage in contracts to trade cryptocurrencies. Derivatives in the cryptocurrency market can include crypto options, crypto futures, and CFDs, which are financial contracts that compensate investors for the asset price difference.
It is worth keeping in mind that top brokers may offer copy trading services, which can be beneficial for those who are new to trading and have limited trading experience.
Here are some things you should consider before selecting a crypto exchange:
- The number of cryptocurrencies and currency pairs offered by the crypto exchange needs to be evaluated as you are looking for a crypto exchange. It would be ideal to have access to fiat options.
- Explore the exchange's trading tools, including spot, margin, and P2P. Having more options would be great.
- Ensure that the exchange's minimum deposit requirement, trading platform functionality, and commissions are reasonable.
- It is important that you research reviews for crypto exchanges and read experiences from other traders in order to make sure that you are choosing a trustworthy exchange.
Among the features you can look for in a cryptocurrency broker are:
- Research the broker's reputation, read reviews and examine the ratings.
- Examine the costs associated with withdrawals, spreads, and other expenses.
- Verify whether the assets database contains cryptocurrencies and other digital assets that you intend to trade.
Crypto brokers work differently than crypto exchanges. Cryptos can be traded as CFDs by brokers; however, there are not many crypto assets that can be traded with these brokers. Crypto brokers have the advantage of being regulated by the government, which translates into their creditworthiness and reliability.
Whenever choosing a crypto exchange, it is important to know that you can only trade cryptocurrencies and other digital assets through this exchange. When it comes to customers who want to invest directly in cryptocurrencies, who have their own assets, or who wish to hold long positions, exchange services are usually a good option for their needs.
Money decisions are solely yours to make. Do your research before you make your choice, and take the time to decide what is best for you. Getting on the right path to financial success can be achieved with appropriate planning and preparation.
Author: Arthur Azizov, CEO and Founder of B2Broker
Arthur Azizov is a FinTech and blockchain expert with over 10 years of experience and an MBA from the Financial University.