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Cryptocurrency Exchange vs Broker

If you are a newbie in crypto or an experienced user, you probably know that there are two major ways to trade cryptocurrencies: a broker and a cryptocurrency exchange. But even for experts in the blockchain sphere, the differences between these two options might be uncertain.

Cryptocurrency exchange vs broker

Take note of an obvious similarity to the stock exchange process.

A cryptocurrency exchange is a place where buyers meet sellers of both cryptocurrencies and fiat money.

An exchange then acts as an intermediary, who enables the trade and charges a fee for this service.

There are two classic examples of using cryptocurrency exchanges. Purchasing cryptocurrencies for fiat money and trading various cryptocurrencies between each other, for example when you want to exchange your Bitcoin for Ethereum.

Different exchanges offer various trading pairs, so it’s always an individual decision of the trader which one to choose. To give the reader an illustration, let’s imagine an investor, who deposits USD on an exchange. He is able to use only USD related pairs such as USD/BTC or USD/ETH before he can trade some other altcoins.

Using cryptocurrency exchange is a traditional way to trade crypto and especially useful for lower amounts of money.

A broker is a mediator in the relationship between traders and the market.

Simply said, a person, which is using a broker for trading, deposits money (or crypto) to the broker’s account, and then has the chance to use various products that the broker offers. A trader doesn’t need to trade his own deposited crypto or fiat currency, but he can use a different trading pair. The broker will find a counterparty for the transaction, in some cases, the broker can serve as a one and execute the trade.

Let’s give you an example for better understanding. The client deposits bitcoin but wants to use leverage trading on Ethereum/XRP pair. So, for his deposited number of bitcoins, he can trade the chosen trading pair. If he would like to do this trade in the cryptocurrency exchange, he would first need to exchange his bitcoin into Ethereum.

The main difference between a broker and an exchange

So, before we will dive deeper into the topic, what is the main difference between a crypto broker vs an exchange?

Using a brokerage is a more suitable variant for higher amounts of money due to several reasons such as security and bigger liquidity. After depositing your collateral, you have various trading opportunities including leverage positions, etc., depending on the services provided by the specific broker. Crypto exchange on the other hand is the simple way to trade cryptocurrencies by using the order book of the trading pair according to the deposited cryptocurrency or fiat money – this is the way a buyer meets a seller, for which the crypto exchange charges a fee.

Keep in mind that there is a physical delivery of the traded asset on the spot exchange, while in margin trading done with a broker, just the underlying asset is traded, not the physical one.

One of the key differences when comparing an exchange and a broker is the target audience. Crypto exchanges are mostly used by crypto HODLers, who want to do some long-term or mid-term investment, to purchase a specific cryptocurrency and then wait for the further possible valuation of the price. Maybe just to buy and move those cryptos to their well-secured hardware wallet.

Brokers are usually used by speculative investors, who make various types of trades and who use different TA instruments and tools provided by brokers such as margin trading. They want to make short-term or mid-term profits and the broker is just a medium of how to reach those.

Registration and verification


The signup process differs in various exchanges. In some of them, the only thing a customer needs to provide is a valid email, which is then confirmed, then to set-up a password and that’s it. Some others, especially those who handle fiat money, need some kind of verification. It can be anything from a video-call, photo of the face holding ID, a scanned ID, or a complete KYC process, especially when a trader wants to use the higher limits of depositing and withdrawing his funds.

The biggest exchange Binance allows you to trade without full KYC, but with a withdrawal limit of 2 BTC per day.

The verification process could take from several hours to a few days, during the 2017-18 bull run, it took some exchanges an even longer time period, and some of them didn’t take any new accounts due to the excessive interest.

Similarly, to the crypto exchanges, the signup process with a broker is also not so difficult. But the verification is essential because the broker is subject to official regulations. Most of the time, a registering person will need to submit ID and some proof of home address, such as an electricity or rent bill.

The process of verification itself will take a bit less time than on an exchange. Right after the account is verified, the trader can deposit funds and start trading immediately.

Deposits and withdrawals


In the crypto exchange, there are two options for how to deposit and withdraw. The first option is fiat money and this can be a hitch. Not only that many exchanges don’t take fiat currency, so there is a need to deposit crypto, otherwise there will probably be high fees for the deposit. There are usually fees for depositing fiat money via a bank account as well as for usage of debit or credit card. The same with withdrawing funds, often the fees are even higher than for a deposit. But will you pay the commission? Probably yes, because you need the money — that’s why you are withdrawing. And before you do so, be sure that your bank accepts transfers from cryptocurrency exchanges, because it’s not a certainty.

When using only crypto deposits and withdrawals, the fees might be much lower, especially the deposit fees, where most exchanges don’t charge those so you pay only a withdrawal fee.

There are clear advantages of using a cryptocurrency broker vs an exchange. The broker offers more deposit options: a bank account, debit card, credit card, various types of e-wallets, and cryptocurrencies as well. With no deposit fees!

Also, when withdrawing from a broker, there is no need to pay high fees as they can vary between 0% — 3%, in some cryptocurrency exchanges the withdrawal fees can be as high as 6%!

Trading


Trading crypto using an exchange is a simple task. Most exchanges offer trading by using orderbooks, where you can do both a limit order or a market order. The liquidity of each exchange differs on its own depth of market (DOM). Higher liquidity usually means a smaller spread between buy and sell orders.

Most of the exchanges provide just basic functions, which could be enough for an average user. A few specialized exchanges now offer also high-leverage trading instruments such as futures or perpetual swaps.

The biggest advantage of an exchange is a wide range of cryptocurrencies that can be traded on their platform.

The broker provides additional tools for trading margins such as CFD trading (Contract for Difference), derivatives, etc. Broker platforms usually also offer specific trading tools that can help their customer with making a trade, such as technical analysis tools like indicators, moving averages, and even automated trading strategies and robots, which helps traders improve their performance and optimize risk management.

When trading CFDs, leverage is used to multiply exposure. For example, if the selected cryptocurrency has a CFD leverage ratio of 1: 2 and the price moves by 5%, the CFD trader will actually make a profit of 10%. Or also a loss of 10%, it depends on the direction of price movement and the type of position that the trader has chosen. In short, this means that CFD traders can earn a large amount of money quickly, but also in the same rapidity lose a large amount. Leverage trades should therefore be used by more experienced traders.

Security


Crypto brokers provide tighter spreads than crypto exchanges. This is the relevant reason why they are so popular especially for those who use margin trading.

Have you heard of the recent KuCoin hack? And what about the HitBTC hack or the Mt.Gox hack? As many of you know, there is some crypto exchange hack here and there, even the biggest players such as Binance are a target of hackers and scammers, as you might remember the Binance KYC data leak from last year.

Crypto exchanges still are and will be vulnerable to various attacks. This doesn’t mean that crypto brokers can’t be hacked or their funds stolen. The difference is, that brokers are regulated and offer clients some degree of protecting their funds. Some compensation for the clients is a welcome change if you come from a wild unregulated sphere of crypto exchanges based who knows where.

Brokers are usually also well audited by an authority, which is a sign of seriousness. You will definitely feel better when you send your valuable funds to a broker, who is strictly audited and regulated by a reputable authority such as SEC or FCA, than to some unknown exchange based in a tax haven. As another level of guarantee, brokers keep the funds of their clients in bank accounts.

As it might sound obvious from the security reasons provided, what is better if you compare an exchange vs a broker, it should always be considered for what purpose you want to use them. When picking a solid exchange with many different altcoins, there could be a possible higher reward for relatively low-security risk.

A trendy and also safer option than keeping your cryptocurrencies, which you just don't want to trade, on cryptocurrency exchanges, is storing them on hardware wallets such as the Trezor or Ledger. The reason is obvious. You may have hundreds of different types of cryptocurrencies stored on the exchange, but in reality, these cryptocurrencies do not belong to you because you do not have private keys for them. They belong to the exchange. Remember the old crypto saying "Not your keys, not your crypto!"

Income


There are both similarities and differences when comparing the source of income between a cryptocurrency exchange vs a broker. Both profits from the fees, but they have slightly different approaches to their clients.

Cryptocurrency exchanges attract traders by various different trading pairs, for which they have quite a wide spread due to liquidity of that relatively small depth of market. They usually charge higher fees for their trades, withdrawals, and sometimes even deposits.

On the other hand, a broker offers lower withdrawal and trading fees, but there are traded significantly higher amounts so the absolute amount of fee could be a similar size.

Cryptocurrency broker vs exchange comparison table

Let’s compare a crypto exchange vs a broker in our comparison table so it’s understandable that each of the solutions suits a different person and user case.

Broker Exchange
Liquidity Deep Average
Market depth Potentially higher Limited
Customer service Experienced Limited
Features For experienced users For average users
Fiat usage Yes Yes/No
Number of cryptocurrencies Low High
Spread Tight Wide
Funds safety Protected Semi-protected
Regulated Yes Depends on location
Crypto exchange vs broker comparison table

Conclusion: What to use, cryptocurrency broker or exchange

In conclusion, there is no direct recommendation of which to use: a crypto broker vs an exchange. Simply said, each one of them suits a different type of client and is dependent on the purpose of the trade.

For a large amount of funds that would be traded, a broker service would be better. A broker is regulated, audited and its funds are on their bank accounts and even if they are hacked, due to the afore mentioned reasons, the client can be compensated in some way. Professional traders can also use their extra tools such as technical analysis and automated trading strategies.

Brokers' services are also suitable for those clients who are engaged in short and medium-term margin trading to benefit from fluctuations in the price of cryptocurrencies.

On the other hand, cryptocurrency exchanges take with the higher risk also the higher possible gains, because even when they could have a higher fee, they provide various different trading pairs, even with some newcoming altcoins that offer very high profit due to the volatility.

Exchange services are equally relevant for clients who need to invest physically in cryptocurrencies (i.e., directly own assets) and hold long positions.

Each solution will be beneficial to different individuals. Always remember that you are handling your precious money, so better to think twice about where to put it and try to do some extra research at the time.

No matter what type of business you are willing to run, Soft-FX can provide you with software suitable for both exchange and broker businesses including Liquidity aggregators and Trading platforms. Just check our solutions and contact us for more detailed information.

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