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Cryptocurrencies

Trading cryptocurrency: Differences between brokers and exchanges

Cryptocurrency trading can take place in a variety of ways. Discover which methods are best for you.

Introduction

Cryptocurrency trading is becoming more popular and there are multiple ways to complete transactions. But there are many issues in the industry surrounding security and trust. Where should you carry out cryptocurrency trading? Should you use an exchange or a broker? What’s the difference between the two? These are just some of the questions that we answer with our guide below. By the end of it, you’ll know some important differences and discover how you can be successful in cryptocurrency trading.

What is a cryptocurrency exchange?

A cryptocurrency exchange works by giving traders a platform to buy and sell coins, tokens, and assets. The exchange serves as an intermediate between buyers and sellers.  However, they usually charge a fee to do so. Cryptocurrency exchanges have a wide range of pairings available. An example of a pairing would be Bitcoin to the U.S. dollar, which would be abbreviated to BTC to USD on an exchange.

Depending on the exchange you use when trading, the pairings and listings available could differ. Some exchanges may only offer the top 10 cryptocurrencies, whereas others may offer more than that. As well as selecting an exchange with the best pairings for your cryptocurrency trading needs, you will also need to make the choice between a centralised and decentralised exchange.

Centralised exchanges

A centralised exchange, or CEX for short, functions in similar ways to traditional stock exchanges. Centralised refers to an entity that has singular control over a service, function or product. A centralised exchange is slightly contradictory to the concept of cryptocurrency because the original purpose of cryptocurrency was to be free from the constraints of singular, authoritative rule.

If you choose to carry out cryptocurrency trading on a centralised exchange, be aware that you’re placing your trust in the platform owner to not steal your cryptocurrency or commit any fraudulent activities. Centralised exchanges are also inherently vulnerable to single points of failure – making them easier to be hacked or disrupted.  Because of this, many people choose to trade their cryptocurrency on a decentralised exchange.

Decentralised exchanges

A decentralised exchange, or DEX for short, facilitates peer-to-peer cryptocurrency trading. Each function of the exchange – capital deposits, order books, order matching, and asset exchanges – are all decentralised. This removes the requirement for a middle man. Peer-to-peer transactions also eliminate the need for a central server to run the operation. With no single point of failure to worry about, a DEX is thought to be much more secure than a CEX.

Decentralised exchanges do, however, have far more limitations that a centralised exchange. There is a general lack of functionality, with only basic market features and functions being made available. Decentralised exchanges also can’t support fiat conversions so users are left with a lot less choice and flexibility when it comes to cryptocurrency trading.

What is a cryptocurrency broker?

A cryptocurrency broker trades your funds through a dealer network. Cryptocurrency brokers are also known as an over-the-counter (OTC) market. Brokers can be individual or platform based but both play a role in finding and pairing buyers and sellers to complete transactions. Typically, using a broker is more flexible and convenient. They also employ a settlement period which is often faster than an exchange. The buyer must complete the payment during the settlement period and the seller must deliver the crypto within the same time frame.

The key difference

The key thing to remember is that brokers will be dealing with transactions as they come. An exchange, on the other hand, is simultaneously balancing trades from all over the world, in real-time, 24/7. Typically, the equilibrium price on the exchanges are defined by the last agreed upon price between sellers and buyers.

How does an exchange work?

  • Traders can transfer their existing crypto to their account on an exchange and use the exchange to buy crypto with Fiat.
  • The exchange holds onto the cryptocurrency.
  • Users watch the prices of other cryptocurrencies available.
  • Traders place their buy or sell orders once they have selected their desired token.
  • The exchange finds a seller or buyer to match your trade.
  • The exchange completes the transaction.

How do brokers work?

  • The procedure for an OTC deal typically begins from the primary buyer or seller.
  • They contact their broker for help in discovering a suitable buyer/seller to complete the deal.
  • Once the broker has found one, all parties will sign a non-disclosure agreement (NDA) and the negotiations begin.
  • Tranche volume and discount is agreed upon the buyer and seller before they start to negotiate a method of transaction.
  • Both parties upload their coins and funds to the broker and sign paperwork  to confirm rates of commission.
  • The deal closes when funds and coins are cleared on both sides.

To find out more about cryptocurrency trading and how to stay safe on exchanges, read our latest guides. 

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