Institutional interest in crypto is growing. More investors from traditional investment sectors are diversifying into crypto. To gain exposure to the crypto market, investors, especially ones conversant with mainstream trading platforms, are torn between using brokers that offer crypto trading services and actual crypto exchanges. While mainstream investors are more familiar with brokerages, crypto exchanges offer native crypto trading experiences and several key advantages. In this article, we discuss crypto brokers and crypto exchanges, and which one serves you better as an investor.
Top Forex Brokers
What is a Crypto Broker?
A crypto brokerage mediates between crypto investors and the crypto market. They manage their customers’ exposure to the crypto market, offering advisory services, contract for difference (CFD) trading, and account management. The best crypto brokerages allow investors to operate in a regulated, accessible, and responsibly managed trading environment that functions like a mainstream trading platform, while exploring crypto market opportunities. Several traditional brokerages also now offer crypto trading services.
A CFD (Contract for Difference) is an agreement between the trader and the trading platform to pay the difference between the value of the asset at the time they purchased it and whenever they decide to sell it (close the contract).
Say a trader wishes to purchase 2 Bitcoin while BTC/USD trades at $100,000 per coin. The brokerage creates a CFD contract for 2 BTC at $100,000 per coin ($200,000 total). Here, the trader receives the contract, not the actual coin. The contract stays open until the trader decides to close it.
If the trader wishes to close the contract while BTC trades at $110,000 per coin, the brokerage pays them the $20,000 difference ($220,000 - $200,000) in addition to their initial $200,000 investment. If BTC goes below the value at the time of investment (for instance $95,000), and the investor decides to close their contract, they will be required to pay the $10,000 ($190,000 -$200,000) difference to the exchange. In this case, the exchange deducts the difference from the initial amount paid by the investor.
What is a Crypto Exchange?
A crypto exchange offers a platform for direct and actual crypto trading. On crypto exchanges, investors trade crypto assets and gain access to their tokens. That is, when you purchase crypto on a crypto exchange, you receive the assets and can send them to your personal wallet. Crypto exchanges allow users to trade directly with other traders and exchange the proper crypto assets through spot trading, P2P, or OTC platforms.
In a nutshell, when you purchase a crypto asset on a crypto exchange, you are buying directly from another trader and will be able to transfer the coin or token to your wallet and use it as you please.
Crypto exchanges offer true custody of the assets to traders. They also offer additional trading services like derivatives, passive income opportunities like crypto lending, and enterprise-based services.
Pros and Cons of Crypto Brokers and Crypto Exchanges
Here are some of the advantages and disadvantages of crypto brokers and crypto exchanges
Crypto Brokers
Pros
- Regulated trading: Crypto brokerages offer a regulated trading environment. The platform handles the bulk of the process on behalf of the investors.
- No custody risks: Investors do not need to worry about handling their crypto assets. Risk related to wallet management, transfers, and more is averted by using brokerages.
- Intuitiveness for mainstream investors: Mainstream investors are more conversant with brokerages. This makes it easier to trade with such platforms.
Cons
- No true custody of assets: Investors do not have access to the crypto they purchase on brokerages.
- Higher trading fees: Brokerages often charge extra fees for processing and custody. This increases the cost of trading on such platforms, compared to crypto exchanges.
- Slower transaction processing: Transactions on brokerages may take a longer time due to the rigorous processing procedure.
Crypto Exchange
Pros
- Direct access to the crypto market and assets: Crypto exchanges allow users to trade and hold actual cryptocurrencies. Users can also trade using advanced tools like bots and enjoy additional services.
- Instant transactions: Purchases and sales on crypto exchanges are executed instantly. Once the orders are filled, the trader gains access to their asset.
- Wide trading variety: The average crypto exchange offers trading services for at least 50 crypto assets. This gives investors more trading options.
Cons
- Complex user interface: Crypto exchange platforms’ interfaces are complex, especially for beginners.
- Custody risks: Investors using exchanges can transfer their assets to their wallets. They are required to secure their wallets and exchange accounts. This exposes them to risks like theft, wrong transfers, and hacks.
- Exchange security risks: Investors could lose all or a significant portion of their investment if an exchange gets hacked or mismanages their funds.
Crypto Brokers vs Exchanges Comparison Table
Summary Table for Crypto Brokers vs Exchanges
Crypto Broker | Crypto Exchanges | |
Trading Fees | Higher trading and management fees | Trading fees range from zero to a small percentage of traded volume |
Supported Assets | Crypto brokers support only popular assets | Exchanges support an average of 150 crypto assets. |
Security | Higher security and regulation. User deposits are usually insured. | Integrates advanced security. However, funds are not insured, and exchanges are vulnerable to hacking. |
Order Types | CFD, regulated spot trading | Spot, derivative, P2P, OTC |
Trading Control | Highly limited | Flexible with wide options |
Ease of Use | Easy to use, as brokers handle the core of the process | More advanced and complicated. |
Transaction Processing Speed | Transactions may take a while to be completed. | Transactions are processed instantly. |
Which Should You Choose?
With an understanding of crypto brokerages and crypto exchanges, you might still be confused regarding which one to use.
Here are a few factors to consider before choosing:
Prior Exposure to Trading Platforms
Crypto brokerages work best for investors whose prior exposure is primarily to the traditional trading platform model. Investors who use digital asset trading platforms to trade assets like gold will easily understand crypto exchanges.
Investment Strategy and Degree of Exposure
Crypto exchanges offer more trading options and the freedom of leveraged trading. Therefore, they are best suited for day traders, arbitrage traders, and investors who wish to develop a diversified portfolio. If you only wish to trade common assets like BTC and Ethereum with the intent to hold for at least a few days, then a brokerage may work for you.
Trading Volume
Crypto brokerages are more liquid than exchanges. Therefore, if you intend to trade large quantities of crypto, you may use brokerages over crypto exchanges and reduce slippage. However, consider additional fees like processing and account management fees.
Location
Investors in regions where crypto trading is highly regulated may use crypto brokerages to gain exposure to the crypto market. In some regions, exchanges may be more accessible than brokerages. Investors in these regions may have to choose crypto exchanges over brokerages.
Tips for Crypto Beginners
Crypto brokerages are arguably more suited for beginners. But this is only because the platform handles the procedure and simplifies the profit and loss calculation for users. Depending on your investment strategy, crypto exchanges may be best suited for you, even as a beginner.
Crypto exchanges are complicated; regardless, they offer proper exposure to the crypto market and technology. If you only wish to make a profit from trading popular crypto assets, then you may use brokerages, at least until you understand exchanges better. However, if you wish to build a long-term crypto investment venture, crypto exchanges are essential. As a beginner, you can gradually learn the ropes and understand how exchanges work. Also, integrate self-custody facilities like decentralized exchanges, cold storage, and mobile wallets in your learning process.
Safety, Security & Regulation
Crypto brokerages are a safer, more secure, and well-regulated medium of investing in crypto. They are safer and more secure as the platform and users do not need to hold crypto. For investors, brokerages are more regulated than exchanges. The regulatory process ensures adequate customer protection. Brokerages are also usually operated by reputable organizations, which increases investor confidence.
Crypto exchanges manage real crypto assets and a more advanced trading system. Crypto security is complicated, and poor management may lead to loss of a significant portion of users’ deposits. On the other hand, the regulatory background for crypto and crypto exchanges is still developing. AML and KYC policies are still being enforced for native crypto trading platforms. User safety and security, and regulation are therefore sub-par compared to brokerages.
My Take
Crypto exchanges offer flexible exposure to the crypto market, albeit with increased risks. A preliminary exposure through brokerages may be best suited for beginners and mainstream firms diversifying into the crypto market. However, the brokerage experience is very limited and is not without its own risks. For a growing sector like crypto, a flexible trading medium is essential as it enables the investor to experiment and develop more rewarding strategies. Crypto exchanges offer this on a platter.
Furthermore, the security of exchanges has also gotten better with the introduction of authentication technologies, cold storage and multi-signature security facilities, and Proof of Reserves (POR) audit systems. Recent developments also offer clarity on crypto regulations. Therefore, a risk-managed acquaintance with exchanges is important. Investors may combine both options (crypto brokers and crypto exchanges) where possible.
