Cryptocurrency Brokerage or Exchange?

In spite of its recent introductions, investments in cryptocurrencies are ever increasing thanks to an increase in the consolidation of Blockchain technologies and some calculations have forecasted the cryptocurrency markets to hit around $10 trillion in the next five years. 

Further compounding the issue of choice of investment in the various types of cryptocurrencies is the choice as to whether one should use an exchange or consult a broker when investing. 

To answer this question and clear this conundrum, we will be taking a look at:

  1. What defines a cryptocurrency brokerage
  2. Difference between a cryptocurrency brokerage and exchange
  3. Why investors should use a brokerage

So what is a Cryptocurrency Brokerage and Broker?

A cryptocurrency brokerage is an organisation consisting of one or a set of individuals, known as cryptocurrency brokers. These brokers facilitate the buying and selling of cryptocurrencies securely for investors. They also assist clients in managing investment portfolios by letting them know of market updates.

Like typical brokers, they act as financial intermediaries between the buyers and sellers in the cryptocurrency markets and generally charge a certain percentage of the investment as fees or commissions for their services.

Are Cryptocurrency Brokerages and Cryptocurrency Exchanges the same thing?

In a short answer, no. 

A cryptocurrency exchange is merely an online platform where buyers and sellers trade cryptocurrencies between each other at market prices. Fees such as currency conversion fees, transaction fees and withdrawal fees are charged.

Cryptocurrency brokerages on the other hand act as intermediaries between buyers and sellers.

So while the difference between the two might seem minimal, brokers are more commonly used by investors who are new to crypto trading, prefer personalized services and leverage the trading expertise of the broker in order to handle their crypto investments.

Should I use a Brokerage or an Exchange?

For some it is a dealbreaker when considering to use cryptocurrency exchanges mainly due to exchanges commonly holding custody of the investors assets which could lead to security issues, and the complexity of the cryptocurrency markets. In addition there are other reasons to prefer a brokerage over an exchange.

Few concerns to keep in mind when using a crypto exchange include:

  1. Privacy: Exchanges store a user’s personal information such as their IP addresses, emails and transaction details, leaving little to almost no privacy at all for the end user.
  2. Data Breaches: Regardless of the security sophistication of exchanges, data breaches in the form of hacking and phishing are still prevalent, putting the end user’s personal digitally uploaded documents at risk.
  3. Loss of Funds: While hacking and phishing constitutes a major portion of the loss of funds for an exchange’s end users, there are instances where scammers pose as legitimate exchanges and through deceitful means, steal both the end user’s funds and their personal information.
  4. Safety and Security: Even with relatively strong passwords and 2-Factor authentications, there is no 100% guarantee on the safety of funds due to the fact that each exchange varies in security levels. In addition, the existence of fake crypto websites, social media accounts and phishing also prove that such exchanges are not 100% foolproof. Many well known exchanges have been hacked in the past which have caused enormous losses for the investors who chose to store their digital assets within an exchange.

Cryptocurrency brokers solve this problem by: 

  1. Being regulated by a reliable authority such as AUSTRAC, which ensures a safe and regulated environment for beginner investors.Being members of investor compensation schemes whose sole objective is to secure the claims of their clients’ crypto investment portfolios in case of certain unforeseen circumstances such as bankruptcy, victims of hacking and theft. 
  2. Being members of investor compensation schemes whose sole objective is to secure the claims of their clients’ crypto investment portfolios in case of certain unforeseen circumstances such as bankruptcy, victims of hacking and theft.
  3. Depositing investor’s funds in reputed financial institutions such as a bank or a trust, in addition to an investor’s private wallet such as Trezor and Ledger hardware wallets.
  4. Providing attractive prices for both sellers and buyers involved in high volume trades of say, $10,000 while also using their own tools of technical analysis and automated trading strategies to minimise the spread, and thus provide better prices for their clients.

What else makes a brokerage unique in comparison to a crypto exchange?

In addition to the aforementioned reasons, other reasons for an investor to use a brokerage is:

  1. Low Spread and Slippage Costs: Since crypto purchases and sales are distributed evenly to identify high liquidity across various trading platforms, you are ensured the least amount of slippage and spread along with the highest amount of profitability.
  1. Larger Liquidity Pool: Crypto exchanges rely on the population of buyers and sellers to buy and sell cryptocurrencies to ensure adequate asset liquidity and maximum profitability for themselves. Brokers ensure this by monitoring the crypto market, following the trader’s instructions to buy and sell across those platforms globally and increasing global order book liquidity of that asset, that is the cryptocurrency.
  1. Increased Cryptocurrency Trade Pairs: Brokerages are able to provide a wide range of digital asset pairs including Bitcoin to AUD, or Bitcoin to Ethereum, or even less common coins. Usually a broker may be able to offer you the trading pair you are looking for before it is found in exchanges.

Fantastic, but what’s the bottom line in all of this?

The bottom line is that using a crypto broker can save you several hours of market research in finding the best crypto deals and getting you the best lowest possible fees and market rates in order to enjoy the greatest market profitability.

At the same time, it is highly recommended that when choosing your preferred broker, you research very carefully as each brokerage offers different slippage charges and spreads for the traded cryptocurrencies. 

It is also worth noting that cryptocurrencies are extremely high risk assets operating in a volatile market and that investments should be executed in a safe and secure manner.

That being said, Amber Oak Capital hope you enjoyed reading our article.

Feel free to contact us here for any other queries regarding our Cryptocurrency brokerage services!

Disclaimer: The information on this website is purely for information. Amber Oak Capital is not a financial adviser, and nothing stated here is to be taken as financial advice. You should seek independent legal, financial, taxation or other advice relevant to your financial situation before making any investment decisions.