Crypto Exchange vs. Broker: What’s The Difference?

After Voyager Digital declared bankruptcy in July, many have wondered where it is safe to trade and leverage cryptocurrencies. Moreover, what is the difference between a broker like Voyager Digital and a cryptocurrency exchange like Binance?

The Difference Between A Crypto Exchange and Broker

Both crypto brokers and crypto exchanges allow traders to exchange cryptocurrencies. However, their similarities diverge in how they operate and the trade counter-party. A cryptocurrency exchange facilitates the matching of trades between users on its platform. On the other hand, a broker will always take the other side of the user's trade.

For instance, the best crypto exchanges will often show an order book that lists buy and sell orders that are waiting to be paired with other users. Once a buyer or selling has been found that is willing to pay the right price, the exchange will facilitate the trade between the users. The difference with a broker is they always take the other side of the trade. Some methods include using their own capital, or placing the user's order on another platform and charging a premium.

Should You Pick A Crypto Exchange or Broker?

For beginners that want to trade small crypto amounts infrequently, then brokers are more convenient and have a simpler trading experience. On the other hand, crypto exchanges are geared toward serious investors and traders that are looking for a wider selection of coins and the lowest conversion fees. In addition, crypto exchanges are suitable for frequent high-volume trades with fee discounts based on higher trade volumes or staking the platform's native tokens.

In both cases, the registration process has been largely standardized and quick to create an account. They require an upload of an ID document (driver’s license, passport), a photograph holding the ID or payment method, or even supplying utility bills matching the valid ID name. In terms of safe, the larger the exchange or broker is, the more likely it is to be more secure with bank-like account security measures.

Crypto Exchanges and Brokers – The Basics Explained

Crypto brokers and exchanges provide the baseline service of allowing individuals to buy cryptocurrencies. Traditional crypto CFD brokers such as Plus500 and eToro are commonly used for asset speculation, traders don’t actually own the asset. Meaning, that they can’t access it on a blockchain, view its address on a blockchain explorer or transfer it to a non-custodial wallet.

On the other hand, the most common forms of crypto exchanges typically have a much wider cryptocurrency selection in addition to transferring assets to and from non-custodial wallets. With that said, larger platforms have both brokerage and exchange platforms. Case in point, BitPanda, one of Europe’s largest digital asset platforms, offers both an exchange and an OTC broker. Moreover, the exchange experience can further be upgraded with more trading tools via Bitpanda Pro. All things considered, here is a basic explanation of a crypto broker and exchange with the pros and cons of each crypto service.

What Is A Crypto Broker?

Cryptocurrency broker is based on indirect trading, acting as an intermediary between the market and traders. In other words, just like a stockbroker, Robinhood uses Citadel Securities to execute users’ trades. Whether Citadel Securities or Credit Suisse Securities, these market makers cover traders’ ask/bid spreads to ensure each trade is executed near-instantly and at the best available prices.

In other words, market makers provide liquidity to grease the market. Otherwise, trades would grind to a halt because each ask would have to match the opposite bid. In the case of crypto brokers, the users’ funds are transferred to a dealer network called the over-the-counter (OTC) market. This is essentially a dealer network to match trades, where each party shows the other their private price. A crypto broker will then help negotiate the price and settle the OTC trade.

Crypto brokers are great for allowing asset speculation through shorting crypto – but traders don’t actually own the asset. Meaning, that they can’t access the cryptocurrency on a blockchain, view its address on a blockchain explorer or transfer it to a non-custodial wallet. In all cases — CFDs, futures, crypto options and brokers allow traders to bet on the price differences of the underlying asset (like Bitcoin or Ethereum) without trading the asset itself on a blockchain network.

Pros and Cons of Using a Crypto Broker

Crypto Broker Pros:

  • Trading experience is much simpler and easier to use
  • Good for price speculation via leverage trading for beginners
  • Typically a better customer support because of more involved OTC trading
  • Strict international regulation and compliance to laws

Crypto Broker Cons:

  • Typically have higher fees because they take the other side of the trade
  • Lower number of crypto trading pairs available
  • Do not own the actual crypto asset
  • Contract-based trading periods

What Is A Cryptocurrency Exchange?

Cryptocurrency exchanges can either be centralized (CEX) or decentralized (DEX). A cryptocurrency exchange works by acting like a stock exchange. It is operated by a registered company that provides liquidity for trades, so they are executed near-instantly. The deeper their liquidity, the more efficient CEXs perform, even in extreme market conditions. The compromise for this convenience is that traders give up their private keys to the exchange. This is why a Binance/Coinbase account is equivalent to a custodial wallet, with CEX receiving fees when trades happen. To learn about how crypto exchanges work, read this article next.

In contrast, DEXs make users themselves into liquidity providers (LPs). By using smart contracts, DEXs create liquidity pools consisting of token pairs, such as ETH/USDC. Users can then add liquidity into the pools or tap into them to exchange tokens. LPs are incentivized to provide liquidity because they receive fees whenever a trader uses their liquidity pool to trade tokens.

Crypto exchanges typically have a much wider cryptocurrency selection in addition to sending crypto to and from non-custodial wallets. In short, crypto exchanges are suitable for long-term investors that want to own and hold the actual asset.

Pros and Cons of Using a Crypto Exchange

Crypto Exchange Pros:

  • Greater cryptocurrency selection with new assets constantly added
  • Direct cryptocurrency trading at their market price
  • Can directly purchase the actual crypto asset
  • Typically much lower trading fees, with many reward programs and incentives via exchanges’ native tokens
  • Wider selection of trading tools and integrations with third-party tools and software

Crypto Exchange Cons:

  • Given their much larger user base, the customer service is typically automated
  • Less regulated platform, especially DEXs
  • Trading experience can be more complicated

Crypto Exchange vs. Broker: Which Is Cheaper?

Cryptocurrency changes charge two types of fees — trading and withdrawal. For example, Binance charges a 0.1% fee for sellers and buyers on the spot trading market. However, the withdrawal fee is not percentage-based but fixed, so it doesn’t depend on the total value of the asset. Withdrawal fees are in flux, depending on the asset and the blockchain network being used to transfer funds. Typically, exchanges have fee sections they keep updating for all tokens.

Presently, Binance has the lowest fees of all exchanges, given that it can afford it as the world’s largest cryptocurrency exchange. Moreover, Binance has its own BNB token to pay for discounted fees, a wide range of online services, and occasional rewards. Moreover, Binance has introduced zero crypto trading fees on its platform for BTC trading pairs

Similarly, crypto brokers charge percentage trading fees, which are usually higher than on exchanges as much as 1% per trade in the case of eToro. Brokers also tend to charge extra fixed fees for leveraged trades depending on asset types and market conditions. For example, Webull charges a spread markup of 1% (100 basis points) on either trade side.

Overall, cryptocurrency brokers charge higher fees compared to centralized exchanges. Moreover, their fee structures are more complex and conditional via floating spreads while exchanges have a more direct flat percentage fee or use a maker and taker model that is clear to understand.

Crypto Exchange vs. Broker: Regulation

Under the pressure of international bodies like FATF, almost all large cryptocurrency exchanges are now in compliance with anti-money laundering (AML) and know-your-customer (KYC) rules. However, one should also take into account that, because brokers are more regulated and cater to premium clients, they are less vulnerable to cyber attacks. In other words, brokers comply with standardized state regulations, overseen by the SEC. In contrast, each exchange implements its own security procedures.

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