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There is a growing interest among individuals in using cryptocurrency. Therefore, choosing the right cryptocurrency trading platform is essential for investors/traders and businesses alike. Users have the choice of trading platforms provided by a cryptocurrency exchange or a cryptocurrency broker.
When a user understands the differences between a cryptocurrency exchange vs. broker, they will be able to select the best platform that meets their trading goals and the level of experience and risk that they want to take on.
Cryptocurrency exchanges allow users to trade cryptocurrencies through a peer-to-peer transaction system between the users (i.e., user to user). The exchange provides a method for users seeking to purchase or sell to find other users interested in purchasing or selling, with both types of users being able to access liquidity providers (e.g., banks, brokers, etc.) either via an order book or AMMs.
The method of matching trades is determined by the price and quantity of the asset that is being bought/sold. Users may create limit, market or power (advanced) orders, allowing users to maintain control of the timing and execution of their trades.
Crypto exchanges generally charge lower trading fees than brokerages, making them appealing to very active traders. Crypto exchanges have high transparency levels due to the provision of real-time order books, active charts, and deep order ribbon displays.
The availability of many different types of trading tools, some of which are margin trading and an API for Algorithmic trades, increases the ease and accuracy with which traders can trade on cryptocurrency exchanges.
Beginners may experience hurdles when navigating the numerous complexities of exchange. A beginner will need to familiarise themselves with its features, such as the order book, market volatility and wallet management.
Moreover, centralized exchanges come with their own disadvantages, namely requiring the user to place a significant amount of trust in the platform to provide custody of their cryptocurrency and, in turn, create counterparty risk for the user if the platform were to be compromised from a security standpoint.
Cryptocurrency Brokerage are similar to centralized exchanges, except that a broker will act only as a middleman between the user and the market. In turn, users create an order with a brokerage. The Brokerage connects the user to a cryptocurrency exchange or other liquidity provider that will fill the user's order.
As a result, using a cryptocurrency brokerage will typically provide a much easier, more accessible user experience for the end-user. Pricing is much easier than the pricing structure in an exchange, Instant buy/sell, and there is much less complexity involved.
Many centralized brokerages will provide users with efficient customer service and help them with fiat on-ramps. They also must comply with (local) regulations, so they are appropriate for more inexperienced users or institutional investors.
Many brokerages charge higher fees than their centralized exchange counterparts, and they may have significantly wider spreads. A user will generally have less control over order execution than via centralized exchanges and limited access to advanced trading tools compared to centralized exchanges.
In addition, the pricing of centralized brokerages may be less transparent than the order books of centralized exchanges.
Exchanges
Most cryptocurrency exchanges use a Maker-Taker fee structure. Users who provide liquidity by creating new orders (the "maker") generally pay less in fees than users who buy and sell existing orders (the "taker"). The fee structure is fully disclosed to the user, and as trading volume increases, the user will experience a discount on their fees.
Brokerages
Crypto brokerages generally utilize spreads and fixed commissions to generate income. This model makes it easier for the user to see pricing, but it typically means that trading will be more expensive than using an exchange.
Exchanges
Exchanges provide users with complete pricing transparency by providing a live order book, a bid/ask spread, and a market depth chart. This allows the user to understand exactly how the price has been made.
Brokerages
Brokerages provide users with a quoted price that includes the total cost of executing a trade plus the spread, which makes it easier for the user to place trades, but limits the user's ability to see what the price of the underlying cryptocurrency is at the time.
Exchanges
The liquidity of an exchange is directly generated from users and institutions, creating a more robust order book and providing a better price discovery process, particularly for the highest volume trading pairs.
Brokerages
The liquidity of a broker is largely due to the broker's ability to access exchanges and liquidity providers. Therefore, if a large amount of volatility occurs in a short period of time, the broker may not always have the ability to provide the best pricing.
Exchanges
Traders can decide on order types, execution times, and other factors at an exchange. Exchanges allow for greater flexibility as they give experienced users the most flexibility to execute trades at will.
Brokerage
Brokerages take care of executing trades on behalf of the user and can therefore provide a more user-friendly experience, although this also generally means less flexibility in terms of trading mechanics.
Exchanges
Provides advanced charting capabilities, API access, margin trading, derivatives and algorithmic trading tools.
Brokerages
Focus on providing easy-to-use buy/sell options, but with limited advanced trading capabilities.
Exchange
The security standards set forth by the exchange are determined by the exchange’s respective jurisdiction, which ultimately determines how strictly your funds will be protected by government regulators.
Brokerage
A large majority of brokerage firms operate within stricter regulatory frameworks and have a greater level of compliance and consumer protection than do exchanges.
Cryptocurrency brokers are a perfect option for both novice traders, long-term investors, and institutional investors looking for a simple user interface, regulatory compliance, and certainty in the cost of trading.
A broker is perfect for those who want to invest in the cryptocurrency market without having to learn how to navigate a complex trading platform or cryptocurrency order book.
On the other hand, a cryptocurrency exchange may be a better option for an active day trader, a professional investor, or an investor who needs more advanced trading tools and platforms, more liquidity, and greater control over trade execution.
Cryptocurrency exchanges are especially helpful for those who engage in frequent trading, use arbitrage strategies, or analyze the market at a very high level.
The crypto ecosystem relies on both exchanges and brokers for their services. While exchanges offer users a variety of trading options along with enhanced features, they also provide greater transparency.
In contrast, brokers focus on providing users with a simpler and more accessible means of trading in digital currencies, while also adhering to applicable laws and regulations regarding crypto transactions.
Regardless of which type of service you choose to utilize, the distinction between the two services will help you to understand better how to approach and manage your digital currency investments.
If you are looking to get started with crypto trading platform development, we are here to help you with it. Get in touch with us!
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