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Cryptocurrency exchanges and cryptocurrency brokers both present great avenues to buy and sell various cryptocurrencies. However, they differ in several ways. In this guide, we will take a look at the main differences between crypto exchanges and brokers so that you can figure out which is better for your needs.
What are the main differences between exchanges and brokers?
Before you can understand which is more suitable for you, it’s important to understand the key differences between cryptocurrency exchanges and brokers.
Exchanges pair buyers and sellers using an order book that records each trader’s desired trading price. When the buyers and sellers agree on a price or meet in the middle, a trade happens.
With a cryptocurrency broker, an organisation establishes the sale price and fee they’re willing to work with. Brokers are the middlemen that monitor the market and act on instructions from their customers to buy or sell based on an estimate or quoted price that is generated from live market conditions. A crypto brokerage may provide additional services or features, such as increased privacy.
Key Takeaway
An exchange allows users to trade directly with one another, whereas brokers act as an intermediary between buyers and sellers.
Using a crypto exchange
Registration and verification
Registering for an exchange is not too complex of a process and is often as simple as registering for an account on other websites. The user typically has to provide a few personal details such as their full name, email address, and phone number, as well as create a secure password. After they have created an account with this information, the exchange must conduct Know Your Customer (KYC) verification where the user has to submit certain documents. These documents may differ slightly from exchange to exchange but typically will require some form of photo identification.
Making deposits and withdrawals
Depositing funds to a cryptocurrency exchange can be difficult as they often require users to deposit cryptocurrency. Of course, to do this, they will need to purchase crypto through another exchange or broker and then send it to the new wallet address of the exchange. This requires multiple transactions, orders, and transfers which can result in many additional fees and charges.
Not all exchanges allow their users to withdraw fiat currency to a bank account. Often, this is the case for global exchanges that don’t support multiple fiat currencies. In this case, the user is required to withdraw their cryptocurrency and transfer it to another crypto exchange or broker that supports withdrawals to a bank account with their chosen fiat currency.
Trading
Trading on a crypto exchange is fairly straightforward. You’ll first select the crypto asset you want to trade, open your trade and then place your desired trade size and price. You can still set automatic buy and sell orders to ensure you don’t have to watch your exchange platform like a hawk.
Using a cryptocurrency broker
Registration and verification
Most brokers require their users to complete Know Your Customer (KYC) verification when signing up. This is a process that typically requires users to submit a photo of their government-issued photo ID (i.e. a driver’s license or passport). KYC serves an important purpose for avoiding association with tax fraud and money laundering.
Making deposits and withdrawals
Unlike most exchanges, a cryptocurrency broker provides clients with a number of ways to deposit funds when opening an account. Depending on the crypto broker, users may be able to deposit money via a number of methods including credit/debit cards, bank transfers, and cryptocurrency transfers. If the user is a beginner, they will likely not own any crypto already. Having the option to deposit their home currency into their account, allowing them to purchase cryptocurrency is very useful.
Crypto brokers typically make money from trading fees. For instance, users will be charged a fee every time they buy, sell or swap crypto.
Trading cryptocurrencies
In most cases, brokers purchase large amounts of cryptocurrency from one or more crypto exchanges and then sell them to their own users. Crypto brokers often offer users an extensive range of tools to improve their trading experience including technical analysis charts, price-triggered buy and sell orders, price alerts, and more.
Did You Know?
A lot of the biggest crypto trading platforms including Swyftx and Coinbase are in fact brokers.
Pros and cons of crypto exchanges vs brokers
Like most things, there are pros and cons to each. Whether you choose to use a broker or exchange will be determined by a range of factors including privacy levels, regulatory levels, and fees.
Using an exchange
Pros
May offer greater benefits when it comes to market fluctuations as the market sets the price, not the broker
Great degree of privacy, due to not all exchanges requiring KYC (Know Your Customer) identify verification
Cons
Require more in-depth and up-to-date knowledge of the crypto market
Higher risk, as distributed exchanges are more vulnerable to attacks
Some exchanges don’t allow for fiat currency deposits and withdrawals
Using a broker
Pros
Greater security, as brokers are typically regulated by financial authorities
Deeper liquidity than exchanges
Funds are very easy to deposit and withdraw
Generally offer market analysis services
Often have extensive customer service departments
Cons
You may not be able to capitalise on large market upturns to the same degree as with an exchange
Brokers typically list fewer cryptocurrencies than exchanges
Summary
Crypto exchanges and brokers both have their pros and cons and there is no correct answer as to which is better. This is treated on a case-by-case basis as every crypto trader and investor will have different circumstances and preferences. Generally speaking, however, crypto brokers could be said to be more favourable for beginner and intermediate traders and exchanges are more suited to advanced traders.