Crypto exchange vs broker: What is the difference?

If you have ever looked into buying cryptocurrency, you may have noticed that there are two main ways to do so. You can either buy it through a broker or an exchange.

We are going to take a look at crypto brokers and exchanges, what they are, and the difference between the two.

Broker

A broker is a company that buys and sells assets on behalf of their clients. When it comes to cryptocurrency, a broker will usually buy cryptocurrency from an exchange and then sell it to their client at a higher price. This allows the broker to make a profit on the transaction.

They don’t actually hold any of the coins themselves. Instead, they match you up with someone who wants to buy or sell the same coin that you do.

Exchange

Exchanges, on the other hand, are platforms that allow users to buy and sell cryptocurrency directly from each other. There is no middleman involved in the transaction. The exchange simply provides a platform for the two parties to trade.

The main difference between a broker and an exchange is that with a broker you are paying for the service of buying and selling cryptocurrency on your behalf. With an exchange, you are buying and selling directly from other users.

Cryptocurrency Exchanges vs Cryptocurrency Brokers

So, what’s the difference between a broker and an exchange in the cryptocurrency industry?

For starters, crypto brokers typically offer more traditional investment products such as CFDs, while crypto exchanges mostly just offer spot trading. This means that when you trade with a broker, you’re speculating on the price of a currency pair, rather than actually buying and selling the underlying currencies.

Brokers also tend to offer more leverage than exchanges, which means you can trade with less capital. However, this also makes brokers more risky since you can easily lose all your capital if the market moves against you.

Another key difference is that crypto exchanges usually have stricter Know Your Customer (KYC) and Anti-Money Laundering (AML) policies in place. This is because they’re subject to more regulations than brokers.

Let’s look at each attribute in more detail:

Investment Products:

Crypto brokers offer a wider range of investment products than exchanges. In addition to spot trading, they also offer traditional financial products such as CFDs, options, and futures.

CFDs are contract for difference agreements. When you trade a CFD, you’re speculating on the price of an underlying asset, without actually owning it. For example, you might trade a CFD on the price of Bitcoin without actually owning any Bitcoin yourself.

CFDs are not available in the United States due to local legislation, and US citizens or residents are unable to open accounts with regulated brokers.

If you are in the United States, we recommend checking out Uphold for all your cryptocurrency, equities, and precious metals purchases and trading. 

Options and Futures:

These are both derivative products. A futures contract is an agreement to buy or sell an asset at a future date and price. An option gives you the right, but not the obligation, to buy or sell an asset at a future date and price.

Leverage:

Brokers typically offer more leverage than exchanges. Leverage is a loan that the broker gives you to trade with. This means you can trade with less capital than you would need if you were trading without leverage.

For example, if a broker offers 10:1 leverage, that means you can trade with $10 for every $1 that you have in your account. So, if you have $100 in your account, you can trade with $1000.

This might sounds like a good thing, but it’s actually quite risky. That’s because if the market moves against you, you can easily lose all your capital.

For example, let’s say you’re trading with 10:1 leverage and the market moves against you by 10%. This means your $100 account is now worth $90. And if the market moves against you by 20%, your account is now worth $80. So, as you can see, it doesn’t take much of a move in the market to wipe out all your capital when you’re using leverage.

It’s also worth noting that some exchanges offer leverage, but it’s usually much lower than what brokers offer.

Registration Process:

In order to trade on a crypto exchange, you’ll need to go through a rigorous registration process. This usually involves submitting a lot of personal information such as your name, address, email, and phone number. You may also be required to upload some documents for verification purposes.

The registration process for brokerages is typically much simpler and can be done online in just a few minutes.

KYC/AML Policies:

Cryptocurrency exchanges usually have stricter KYC/AML policies in place than brokers. This is because they’re subject to more regulations than brokers.

KYC stands for “Know Your Customer” and AML stands for “Anti-Money Laundering”. These are both measures that exchanges take to prevent fraud and money laundering.

For example, an exchange might require you to verify your identity by providing a copy of your passport or driver’s license. They might also require you to provide proof of address, such as a utility bill or bank statement.

Fees:

Crypto exchanges charge transaction fees, which are usually a percentage of the total trade value. For example, if you’re buying 10 BTC worth of ETH, you might have to pay 0.1% in fees, which would come to 0.001 BTC.

Brokers, on the other hand, make money by charging spreads. A spread is the difference between the bid and ask price of an asset. For example, if the bid price of ETH is $200 and the ask price is $205, the spread would be $5.

It’s worth noting that some brokers also charge commission fees. This is usually a flat fee that’s charged per trade. For example, a broker might charge a $10 commission fee for every trade that you make.

Speed:

Crypto exchanges can be quite slow, especially during periods of high volatility. This is because they need to match buy and sell orders before trades can be executed.

Brokers, on the other hand, use market making algorithms to execute trades immediately. This means there’s no waiting period and you can get in and out of trades much faster.

Customer support:

Crypto exchanges typically have very poor customer support. This is because they’re usually understaffed and overwhelmed with customer inquiries.

Brokers, on the other hand, usually have much better customer support. This is because they’re typically large financial institutions with dedicated customer support teams.

Security:

Cryptocurrency exchanges are often hacked, which can lead to the loss of customer funds. For example, in 2016, the crypto exchange Bitfinex was hacked and $72 million worth of Bitcoin was stolen from customers.

Brokers are typically much more secure than exchanges because they use segregated accounts to hold customer funds. This means that even if a broker is hacked, customer funds will not be affected.

Conclusion:

So, what’s the difference between a crypto broker and exchange?

Well, brokers typically offer more leverage than exchanges and have simpler registration processes. However, they charge higher fees and might not be as regulated.

Crypto exchanges, on the other hand, have stricter KYC/AML policies in place and are subject to more regulations. They also charge transaction fees, but their registration process is usually more complicated.

There are pros and cons to both options.

So, which one should you use? It really depends on your trading goals and style. If you’re just looking to buy and hold some cryptocurrencies, then an exchange would be the better option. But if you’re interested in speculative trading, then a broker could be a better fit.