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What Is the Difference Between a Cryptocurrency Exchange vs a Cryptocurrency Broker?

Cryptocurrency Exchange

Hello CryptoCoin Believers! By now you must be excited to start investing in cryptocurrency and are wondering where you will purchase your first cryptocurrency. This blog post will lay out the intermediaries you can choose that will help you get started in your journey. 

Crypto exchanges and crypto brokers are both markets but function differently. We will be highlighting services given by each to provide you with more information before you make a choice. 

Some of you might have heard of or even read about the Mt. Gox misfortune. It was one of the biggest crypto exchanges but closed down in 2014 because of several factors. Multiple hacking incidents were the last straw for this cryptocurrency exchange because hackers robbed them of an estimated 850,000 worth of BTC.

This incident caused exchanges and brokers to be under tight scrutiny. Mt. Gox is also the reason why on March 2018, the United States Securities and Exchange Commission ruled that platforms engaged in buying, selling, or trading digital currencies must be registered with them.

What Is a Cryptocurrency Exchange?

Cryptocurrency exchanges are the medium that allows you to buy and sell various digital currencies. You can also convert one cryptocurrency to another form. Furthermore, crypto exchanges offer the conversion of cryptocurrencies to fiat currency or vice versa. 

There are established prices for trading pairs that exchanges support. A frequently-traded crypto pair is Bitcoin (BTC) and Tether (USDT). Also, in some exchanges, other cryptocurrencies are possible through trading pairs only. This pairing allows the individual assets to obtain value despite having no fiat currency backing.

Types of Cryptocurrency Exchanges

There are 3 kinds of crypto exchanges: centralized or CEX, decentralized or DEX, and hybrid

Centralized exchanges (CEX) as the name implies is a company or organization regulated and operates similarly to conventional stock exchanges. In CEX, investors deposit their money, and then,  kept for themselves like how a bank would. When the investor thinks the prices are favorable, they can place their order and the exchange will find a seller that fits their budget or if you are selling, the exchange will find a buyer for you.

CEXs get to decide what kinds of digital assets they will trade and which ones they will exclude. This quality assurance control serves as a guarantee on the part of investors that they will not be trading any fishy financial instruments.

Decentralized exchanges (DEX) don’t use any company or service in managing the assets, trades, and exchanges of their investors. The transactions that take place are peer-to-peer. DEX uses networks and protocols to move money from one user to another. 

Smart contracts power a decentralized exchange’s cryptocurrency trading. The codes executed on the blockchain provide privacy and safety for a DEX’s products and services. The absence of an intermediary makes decentralized exchanges ideal for seasoned investors.

Learn about decentralized finance: Decentralized Finance for Beginners: What Is DeFi?

The third type of exchange is Hybrid Exchange, a combination of the different types of cryptocurrency exchanges. It aims to unite DEX and CEX. CEX possesses better functionality and liquidity while DEX is more private and secure.

Therefore, HEX gives investors autonomy over their trading activities while giving them insurance through the protection of smart contracts.

Many cryptocurrency users believe that hybrid exchanges are the future of crypto trading. Hybrids run smart contracts so that there is no need for a middleman whilst expediting transactions and maintaining low latency.

Top Crypto Exchanges

Here are some of the popular exchanges based on the three types mentioned above.

Some of the top-performing centralized crypto exchanges are the following:

Gemini – provides insurance for its trading platform, offers over 50 kinds of crypto coins, and is simple to use for beginners.

Kraken – established in 2011, this site offers a wide range of coin choices. Also, their great customer support is great which makes it very attractive to investors.

These are the top choices for decentralized exchanges:

UniSwap – one of the biggest DEX with a 24-hour trading volume that averages over $4 billion. It charges low trading fees.

Curve– DEX that is built on the Ethereum blockchain. It facilitates the conversion of crypto coins through liquidity pools. This makes it more stable compared to others.

As for hybrid exchanges, they are still undergoing development and there are no well-known HEXs yet.

Cryptocurrency Broker

Crypto brokers act as arbitrators for individuals who want to exchange their cryptocurrency for a different one. They are either individuals, groups of people or businesses. Also, they often charge higher fees than crypto exchanges, but some investors prefer working with brokers because the system is more convenient and there are several payment methods that are available. Some believe that brokers offer a good and safe way for beginner crypto investors. 

It is important to note that when using brokers to buy and sell cryptocurrency, you are not the owner of any actual crypto. Rather you speculate on the price of crypto derivatives. You will gain profits from the ebb and flow of a certain cryptocurrency’s price. 

There are different kinds of crypto derivatives that you can buy and sell through brokers.

What are Crypto Derivatives? Types and Features

Crypto Contracts-for-difference (CFDs) – these are well-known trading mechanisms that allow investors to speculate on the price movement of a digital asset. Both sides consent to buying or selling crypto on an agreed-upon schedule no matter the market price. This way, investors can get higher returns by buying cryptocurrency at a low price and then selling it for a higher value. 

Crypto Futures – as implied in the name, cryptocurrency futures let investors speculate on the future price of a cryptocurrency. It is similar to placing a bet. Cryptocurrency futures involve contracts between two investors, and they agree to speculate on a cryptocurrency’s price on an upcoming date.

Crypto Options -this is the investment method of buying and selling contracts. Crypto options is a low-cost and low-risk trading method that is used in trading digital assets. The primary function of a crypto option is to give the buyer a choice of buying or selling an asset at an arranged schedule and price. 

Crypto options have two kinds, call and put options. The call option applies when purchasing an asset and the put option is used when a buyer decides to sell his assets.  Crypto options can become a hedge against the volatility and unpredictability of cryptocurrencies.

Best Cryptocurrency Brokers

The following are the best crypto brokers:

Etoro -they became popular because of their ‘social trading’ feature. Their mobile app also increases accessibility for investors who are always on the go. You can trade Bitcoin and build a diversified portfolio with their multitudinous selection of digital currencies.

Interactive Brokers– it is one of the most-trusted brokers that deals with multiple assets such as stocks and ETFs. They have more than 150 ETFs available in their “no transaction fee” (NTF) program.

Additional Insights on Crypto Exchange vs Crypto Brokerage

Cryptocurrency Exchange and Cryptocurrency Broker 101
Image from: River Financial

Cryptocurrency exchanges and cryptocurrency brokers can make or break your first investment. Trusting the wrong individual or company to help you grow your investment portfolio can lead to devastating consequences.

A lot of people are curious about cryptocurrency but it is not advisable that beginners completely work on their own. Experts recommend that they start with investment simulations or seek guidance from a trusted financial advisor.

While you may have heard that it is unwise to put a huge amount into your cryptocurrency investments, it doesn’t mean that you don’t take it seriously once you start. That is why it is vital that you use the educational materials provided in the crypto exchange and crypto brokers’ platforms and regularly meet with an experienced advisor who can help you achieve your financial goals.

Final Word

The information shared with you in this post comes from credible crypto websites. It proves that there is more to cryptocurrency than just digital money. Investing in crypto isn’t just about buying coins and trading them when their value increases, it is also about learning how to trade them in different forms and in different circumstances. 

Cryptocurrency exchanges and brokers operate on different principles and mechanisms. Your investing goals and risk tolerance will determine which is better for you. It is important to note that exchanges and brokers require you to use a crypto wallet protected by private keys. Both of these are essential in protecting your stored cryptocurrencies.

As always, we recommend doing a lot of research before settling on a financial decision. We hope that this preliminary will serve as guidance for your future choice.

Think twice and think wise CryptoCoin Believers!

Hi! I am Tracie, an Education major with an interest in Finance and Investing. Come and explore the crypto world with me! :)

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