Trading cryptocurrency can be a lucrative activity. Understand the markets and make the right trades, and you could walk away with some impressive profits. With the increasing popularity of crypto markets, more and more traders are getting into the space. The first thing these new traders need to establish is whether they should choose a cryptocurrency exchange versus a broker. Crypto exchanges and brokers represent the two different approaches you can take to access the market and make trades. Both options come with slightly different trading scenarios, and both have their pros and cons. It's essential that you choose the right solution for your trading knowledge and style. In this guide, we’ll break down everything you need to know about crypto brokers and exchanges to help you understand which option to choose.

What Is A Cryptocurrency Exchange?

A cryptocurrency exchange is a platform that allows users to buy, sell, and trade cryptocurrencies. These exchanges typically offer a variety of digital currencies, such as Bitcoin, Ethereum, and Litecoin, as well as various trading pairs, such as BTC/USD or ETH/BTC. Some exchanges also allow users to trade traditional fiat currencies, such as the US dollar or Euro, for cryptocurrencies. As crypto exchanges continue to grow and develop, many of them are implementing new features to attract and retain customers. A lot of well-known exchanges are incorporating features like DeFi, NFTs, multiple tokens, contests, staking, and other innovative tools to improve the user experience.

Pros to Using a Cryptocurrency Exchange

Cryptocurrency exchanges offer various benefits to traders and crypto investors. Let’s break some of these down.

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Direct trades. You can directly trade cryptocurrencies on a crypto exchange. This means you can buy or sell crypto for another crypto or fiat currency without dealing with the price difference.

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Variety. Cryptocurrency exchanges offer an easy way to buy, sell, and trade cryptocurrencies. Users can access a wide range of digital currencies and trading pairs in one place. As such, it’s simple to manage all of their investments.

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Liquidity. Crypto exchanges are very popular, with large numbers of users. Because of this, the platforms experience high trading volumes and increased liquidity. This makes it easy for users to buy and sell cryptocurrencies quickly and at competitive prices.

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Security. Reputable cryptocurrency exchanges take security very seriously. They use various measures to protect users' funds, such as cold storage and two-factor authentication.

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Regulation. Some crypto exchanges are regulated for safer cryptocurrency trading. This provides added protection for users and helps to make the crypto exchange platform more trustworthy.

Cons to Using a Cryptocurrency Exchange

There’s no perfect solution for trading cryptocurrency, which means even the most well-established cryptocurrency exchanges come with their downsides.

Here are some of the main cons of using a crypto exchange:

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Security risks. Yes, we just highlighted the security benefits of a crypto exchange. However, crypto exchanges have also been targeted by hackers in the past, resulting in the loss of millions of dollars worth of cryptocurrency. This means they’re not always 100% secure.

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Limited control. Crypto exchange users rely on the exchange to keep their funds safe and to execute trades accurately. If you want total control over trading cryptocurrencies in real-time, then exchanges could be quite limiting.

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Fees. Trading cryptocurrencies on an exchange can get expensive. Crypto exchanges charge fees for transactions, which can add up and eat into your trading profits.

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Downtime. Although this is rare, exchanges can experience technical issues, such as system outages. This would prevent users from accessing their funds or executing trades. If you’re a serious crypto trader, this presents a risk for using an exchange.

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Lack of regulations. While many reputable cryptocurrency exchanges are regulated, some are not. This increases the risk of fraud and minimizes the protection users have. If you choose to trade crypto assets on an exchange, always look for a properly regulated platform.

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What is a Cryptocurrency Broker?

A cryptocurrency broker is a company or individual that acts as an intermediary between buyers and sellers of cryptocurrencies. Just like traditional stock brokers, crypto brokers help traders buy and sell different cryptocurrencies. Crypto brokers sometimes provide a platform for traders to buy and sell cryptocurrencies at a price set by the broker. The broker will typically take a commission or fee for each transaction. A crypto broker could also offer extra services, like providing trading advice and market analysis to investors. In addition, they could offer derivatives products, such as cryptocurrency futures, options, and CFDs to traders. This allows traders to enter into contracts based on the value of cryptocurrencies. These derivatives products let traders speculate on the price movements of cryptocurrencies without actually owning the underlying assets. Crypto brokers will generally profit from trading through two strategies: trading rate fluctuations and investing. However, the most widely used approach crypto brokers use is trading cryptocurrencies based on price volatility. Instead of buying and selling Bitcoin, altcoins, or other crypto assets directly, crypto brokers use contracts for difference (CFDs) to speculate on their price movements. In a CFD, a buyer and a seller agree on the difference in the value of an asset between the time of the contract and the time the trade is completed.

Pros to Using a Cryptocurrency Broker

Using a cryptocurrency broker is an attractive option for many traders. Here are some of the main reasons why this is the case:

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Convenience. Buying and selling cryptocurrencies through a broker is often more convenient than using a decentralized exchange, especially for beginners.

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Security. Cryptocurrency brokers typically offer more security for your funds than holding them on an exchange. This is especially important for crypto traders investing large sums of money.

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Regulation. All cryptocurrency brokers are regulated by financial authorities. This adds an extra level of protection for your investment.

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Education. Some brokers provide educational resources and market analysis to help you make informed trading decisions.

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Trading CFDs. CFD trading is easier to do with brokers.

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Support. Cryptocurrency brokers will typically offer a high level of support, often available 24/7. As such, they are a convenient option for traders.

Cons to Using a Cryptocurrency Broker

Crypto brokers may be convenient for many traders, but taking the broker approach also comes with some possible disadvantages to consider.

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Fees. Brokers often charge higher fees than decentralized exchanges. This can really impact your trading profits - especially for large trades.

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Limited cryptocurrency selection. Not all brokers offer trading in all available cryptocurrencies. Thus, it’s important to choose a crypto broker for the specific type of cryptocurrency trading you plan to do.

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Lack of control. When you hand over your funds to a broker, you lose some control over your investment moves. You are also dependent on the broker's security measures.

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No direct exchanges. Traders using brokers miss out on the chance to trade crypto and fiat currency directly.

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Trust. There are a lot of fake or unreliable cryptocurrency brokers out there. If you’re new to trading, it could be easy to entrust your funds with these brokers and lose everything. Don’t always trust the lucrative promises that crypto brokers offer.

Cryptocurrency Exchange Vs Broker Similarities

While they are entirely different methods for trading, using cryptocurrency exchanges and cryptocurrency brokers actually comes with many similarities. Here are some of the things that brokers and exchanges have in common:

Crypto Gateways

Both brokers and exchanges are the gateways that you can use to trade in cryptocurrencies. If you want to access crypto markets and exchange crypto assets, then these are the places where you can buy and sell. Both brokers and exchanges offer forms of online marketplaces where you can do this. Of course, the way this is set up is different for each. Crypto exchanges provide access to the market where traders can make direct trades. Brokerages, on the other hand, act as an intermediary between the trader and the market.

Commissions And Fees Structure

Both crypto brokers and exchange services act as the middle man for traders wanting to enter the crypto market. This means that both forms of trading take transaction fees. However, the exact fee structures change depending on the specific service. Brokers will usually charge trading fees based on the size and volume of the trade. However, some brokers offer a 0% commission for certain users. Most crypto exchanges will take a fee as a percentage of the trade’s value. This means no matter how large the trade is, the percentage fee will remain the same. Both types of trading platforms also charge extra fees, like deposit and withdrawal fees. Of course, the exact fee structure changes based on the crypto broker or exchange.

Real-Time Market Data

Cryptocurrency brokers and exchanges both give traders access to real-time market data and price quotes. The way you trade cryptocurrencies on each platform is slightly different, but traders still get an up-to-date price when buying Bitcoin or other cryptos with brokers or exchanges.

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Candlestick chart displays cryptocurrency price on a mobile device.

8 Differences Between A Cryptocurrency Exchange vs Broker

While both brokers and exchanges offer similar gateways into the crypto market, they also operate very differently. It's important that any new traders understand all of the differences between these options, as the approach you take will result in a completely different trading experience. Here are some of the key differences between a cryptocurrency exchange and a broker:

Trade Methods

First of all, the trade methods used by brokers and exchanges usually look quite different. Swapping is a classic trade method used by cryptocurrency exchanges, which is suitable for trading smaller amounts of money. In this method, a person uses their existing funds to directly exchange them for another form of cryptocurrency. On the other hand, cryptocurrency brokers generally use a different approach called leverage trading. This allows their clients to use the funds available in the broker’s account to make deposits and trades. Traders can then place trades with a higher value than the funds they have deposited - a strategy called “leveraging”. This approach allows traders to potentially make larger profits, but it also increases the risk of loss. So, the main difference between exchanges and brokers is that exchanges allow for direct swapping, or trading, of cryptocurrencies, while brokers provide leverage trading.

Direct Trading

A crypto exchange offers a way for traders to directly trade with each other. Buyers and sellers can trade cryptocurrencies for other cryptocurrencies, or fiat currencies, directly with each other. This is all based on the current market prices. In this setup, the crypto exchange is really just a platform that allows for this trading to take place. Brokers, on the other hand, have a more hands-on role in facilitating these trades. This means you use them for indirect trading. With a crypto broker, the trader uses a broker as an intermediary to access the crypto markets. Crypto brokers enable the trader to buy and sell crypto assets, based on prices set by the broker. It’s a less direct way of trading crypto, where buyers and sellers don’t connect directly.

Types Of Crypto Trading

It’s important to understand the different types of cryptocurrencies that brokers and exchanges allow. In most cases, crypto exchanges offer a far wider range of available cryptocurrencies, as traders can connect with each other directly. With brokers, the type of crypto trades available depends on the broker, so they are usually a lot more limited. You will be able to trade most major forms of cryptocurrencies with brokers. However, some brokers won't facilitate certain trades. This is why it’s important to understand exactly what form of crypto you plan on trading before joining a brokerage.

Order Types

When it comes to trading strategies, it's important to understand the available order types that each option facilitates. Exchanges usually offer a wide range of order types such as limit orders, market orders, stop-loss orders, and margin trading. Brokers, on the other hand, may offer a more limited set of order types. When comparing an exchange and brokerage trading platform, traders will generally have a lot more freedom when working through an exchange. Because brokers act as an intermediary, they can be a lot more specific about the trading strategies and order types available.

Security And Regulation

One of the key differences between trading with brokers and exchanges is the aspect of security. This is very important to consider, especially when dealing with large trades. Exchanges are generally considered less secure than brokers. This is because there’s a lot less regulation around exchanges than there is for brokers. While brokers are always regulated by financial authorities, this isn’t always the case for exchanges. Trading on an unregulated crypto exchange is certainly a risky move. Cryptocurrency exchanges have also been known to be targeted by hacking attacks. If you use a crypto exchange, you are responsible for your funds. Brokers, on the other hand, typically offer more security in their trading platforms, as well as insurance for their client's funds.

Liquidity

Large-scale traders often prefer using exchanges, as these platforms generally allow for more liquidity than brokers. Of course, this depends on the broker and the exchange. However, if you’re looking to go big with crypto trading, then choosing an exchange could make this easier.

Additional Services

Cryptocurrency brokers often offer additional services, like holding cryptocurrencies for their clients. You can choose brokers based on the different services and areas of specialization that they offer. Brokers also tend to offer useful resources to help traders understand the market better and make more informed decisions. Exchanges, on the other hand, are a lot more straightforward. A crypto exchange is really just a platform where traders can access the crypto market, without having access to the extra resources that brokers offer.

Trading Experience

As a new trader, choosing between using a crypto broker or a crypto exchange is a big decision. There are clear pros and cons to each option. However, it's generally accepted that brokers are a better option for new crypto traders. Brokers are generally safer to use, and they can help first-time traders better understand the trades they’re making. Traders can buy and sell crypto at the price set out by the broker, which is a much easier approach compared to trading on an exchange. Brokers are also an easier option for smaller trading volumes.

If you're a more experienced trader, then there are certainly advantages to using an exchange. Most notably, you can make direct trades, cut out broker fees, and access greater trade volumes. Although, it's critical that traders who use exchanges are completely aware of how the cryptocurrency market works and what kind of impact their trades will have.

Key Takeaways

Whether you choose a crypto broker or exchange really just depends on how experienced you are in trading, what types of trades you plan to do, and how much risk you’re willing to take on. Generally, crypto exchanges are more suitable for experienced traders, while brokers are a smarter choice for beginners. In both cases, understanding the market and knowing the ins and outs of crypto trading is essential. The better you understand how to trade, the more successful you will be.

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