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If you have ever thought of purchasing digital currency, you may have noticed that there are two primary ways by which you can do so. One is directly from the exchange and the other is through a broker. Now, what is the difference between them? This article will do a comparison of crypto exchange vs broker to help you understand which one you should choose and why.
Who Is A Crypto Broker?
A crypto broker is an entity that purchases and sells assets on behalf of its clients. When it comes to digital currency, a broker will generally purchase digital currency from an exchange and then will sell it to their clients at a higher price. This enables the broker to earn a profit on each transaction. They do not actually hold any of the coins themselves. Instead, they match up with someone who wishes to sell or purchase the same coin that you do. The best crypto broker for beginners is Robinhood. Other than that, other crypto brokers include:
- Robinhood
- Webull
- TradeStation
- Binance.US
- Coinbase
- eToro
- Kraken
- Charles Schwab
What Is A Crypto Exchange?
Exchanges, on the contrary, are platforms that enable users to purchase or sell digital currency directly from each other. There are no middlemen associated with the whole transaction. The exchange simply offers a platform for the two parties for the purpose of trading.
The primary difference between a broker and an exchange is that with a broker you are paying for the service of purchasing and selling digital currency on your behalf. With an exchange, you are selling and purchasing directly from other users. The best crypto exchange for beginners is Binance. Other than that, other crypto exchanges include:
- Coinbase.
- Robinhood.
- Binance.
- Gemini.
- FTX.
- Crypto.com.
- Kraken.
Crypto Exchange Vs Broker: How Are They Different?
So, in this comparison of crypto exchange vs broker, we will find out what is the difference between a broker and an exchange in the digital currency space?
For beginners, crypto brokers typically provide more traditional investment items like CFDs, while crypto exchanges mostly just provide spot trading. This implies that when you trade with a broker, you are speculating on the value of a currency pair, rather than actually purchasing and selling the underlying currencies.
Brokers also tend to provide more advantages in comparison to exchanges, which implies you can trade with less capital. However, this also makes brokers riskier as you can conveniently lose all your capital if the market shifts against you.
Another primary difference is that crypto exchanges generally have stricter KYC (Know Your Customer) and AML (Anti-Money Laundering) policies in place. This is because they are subject to more regulations in comparison to brokers. Let us look at each parameter of this comparison on crypto exchange vs broker in more detail.
Investment Products
Crypto brokers provide a broader range of investment products in comparison to exchanges. Along with spot trading, they also provide traditional financial products like CFDs, futures, and options.
CFDs are basically contracts for different agreements. When you trade a CFD, you are evaluating the value of an underlying asset, without really owning it. For instance, you might trade a CFD on the value of Bitcoin without actually owning any BTC yourself.
If you are in the U.S, we suggest checking out Uphold for all your digital currency, precious metals, and equities purchases and trading.
Options and Futures
These are both derivative items. A futures contract is an agreement to purchase or sell an asset at a future price and date. An option offers you the right, but not the obligation, to purchase or sell an asset at a future price and date.
Leverage
Brokers typically provide more leverage in comparison to exchanges. Leverage is a loan that the broker offers you to trade with. This implies you can trade with lower capital than you would require if you were trading without leverage.
For instance, if a broker provides 10:1 leverage, that implies you can trade with $10 for each $1 that you have in your account. So, if you have $100 in your account, then you can trade with $1000.
This might sound like a good thing, but it is actually quite risky. That is because if the market falls, you can easily lose all your capital.
Registration Process
In this crypto exchange vs broker comparison, let us see whose registration process is easy. For trading on a crypto exchange, you will require to go through some rigorous registration steps. This usually includes submitting a lot of personal data like your name, email, address, and phone number. You may also be needed to upload some documents for the purposes of verification.
The registration procedure for brokerages is typically much easier and can be done online in just a few steps.
KYC/AML Policies
Digital currency exchanges usually have stricter AML or KYC policies in place in comparison to brokers. This is because they are subject to more regulations than brokers.
AML stands for “Anti-Money Laundering” and KYC stands for “Know Your Customer”. These are both steps that exchanges take to safeguard money laundering and fraud.
For instance, an exchange might need you to verify your identity by offering a copy of your driver’s license or passport. They might also need you to offer proof of address, such as a bank statement or utility bill.
Fees
Now coming to the main part of this crypto exchange vs broker comparison. Crypto exchanges levy transaction fees, which are generally a percentage of the total trade value. For instance, if you are purchasing 10 BTC worth of ETH, you might have to pay 0.1 percent in fees, which would come to 0.001 BTC.
Brokers, on the contrary, earn money by charging spreads. A spread is a difference between the asking price and the bid of an asset. For instance, if the bid value of ETH is $200 and the asking price is $205, the spread would be $5.
It is worth noting that some brokers also levy commission fees. This is generally a flat fee that is charged per trade. For instance, a broker might charge a $10 commission fee for each trade that you earn.
Speed
Digital currency exchanges can be quite slow, mainly during the times of high fluctuations. This is the reason they are required to match purchase and sell orders before trades can be implemented.
Brokers, on the contrary, use market making algorithms to implement trades on an immediate basis. This implies that there is no waiting period and you can get in and out of trades much quicker.
Customer support
Crypto exchanges usually have very poor customer support. This is because they are usually overwhelmed and understaffed with customer inquiries.
Brokers, on the other hand in this crypto exchange vs broker comparison, typically have much better customer support. This is because they are generally large financial institutions with dedicated customer support teams.
Security
Digital currency exchanges are often hacked, which can lead to the loss of customer funds. For instance, in 2016, the crypto exchange Bitfinex was hacked and nearly $72 million worth of BTC was stolen from users.
Brokers are generally much more secure in comparison to exchanges as they use segregated accounts to hold the funds of the customer. This implies that even if a broker is hacked, customer funds will not be impacted. But before choosing any broker, it is always advisable to see their cryptocurrency broker license.
Wrapping Up
So, after this comparison of crypto exchange vs broker, what is the difference between an exchange and a crypto broker?
Well, brokers typically provide more leverage in comparison to exchanges and have simpler registration procedures. However, they charge higher charges and might not be as regulated.
Crypto exchanges, on the contrary, have stricter KYC or AML policies in place and are subject to stricter regulations. They also levy transaction fees, but their registration process is usually more complex. There are benefits and drawbacks to both choices.
So, which one should you avail yourself of? The answer really depends on your trading aims and style. If you are just looking to purchase and hold some digital currencies, then an exchange would be the better choice. But if you are interested in theoretical trading, then a broker could be a better option for you.
Frequently Asked Questions On Crypto Exchange Vs Broker
1. Is Binance a broker or exchange?
Binance is one of the leading digital currency exchanges in the crypto space. It offers a huge range of cryptos for the users to trade.
2. What is the difference between crypto exchange and broker?
In this crypto exchange vs broker, it can be asserted that brokers also tend to provide more advantages in comparison to exchanges, which implies you can trade with less capital. However, this also makes brokers riskier as you can conveniently lose all your capital if the market shifts against you. Another primary difference is that crypto exchanges generally have stricter KYC (Know Your Customer) and AML (Anti-Money Laundering) policies in place. This is because they are subject to more regulations in comparison to brokers.
3. Are crypto exchange brokers?
Yes, there are several crypto exchanges like Coinbase that also acts as a broker.
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