Crypto Exchange vs Crypto Broker – What Should You Know
Hello everyone, today we will talk about the difference between the cryptocurrency exchange and the crypto broker. Moreover, we will tell you when it’s best to trade on the crypto exchange and when you should go with the cryptocurrency broker.
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“Should I trade on the crypto exchange or should I trade with the crypto broker?”
This is one of the most commonly asked questions that we received recently.
The Difference Between Crypto Exchange & Crypto Broker
We will go straight to the point. When you want to keep your crypto coins for a longer time, you need to go for the crypto exchange. If you want to speculate and buy and sell quickly, for example, buy in the morning selling the afternoon if there is movement then you need to go for the Forex broker.
Why do we say Forex broker?
Because the brokers that offer crypto trading nowadays, all have started with Forex trading. Most of the brokers are Forex brokers because their main business was the Forex before the crypto came out.
So what is the difference and why we say that if you want to keep your coins longer you go for Coinbase, Binance, or any other crypto exchange?
The difference is that on the crypto exchange when you buy coins, you actually get the coin. You get the token. You get the chance to put this token or coin in your wallet. And you don’t have any fees for holding them in your wallet, you can hold them for months and years, nobody will charge you for that.
Swap Fee
Well, with the crypto broker, if you buy Bitcoin, for example, you will be charged every night a small fee called swap. And this is a very small fee compared to the fee you pay on the Coinbase crypto exchange when you initially purchase.
Let’s take one Bitcoin, for example. If we buy one Bitcoin, we pay at the moment (in December 2020) about €300 as a fee on the Coinbase crypto exchange for a complete Bitcoin. While with the Forex broker, we will pay just the spread. With the different brokers it’s different, but let’s say it’s somewhere between $10 and $30.
Do you see the difference? Crypto exchange €300, crypto broker $20 average. It’s a huge difference. But what happens here with the crypto broker is that if we keep our Bitcoin overnight, we will pay somewhere between $6 and $10 as a fee. So every night $6, $6, $6, $6, $6. If we keep the Bitcoin long enough, it will get more expensive compared to the Coinbase crypto exchange.
The Crypto Broker Enables Trading With Robots
We use the crypto broker for automated trading where we trade with Robots on MetaTrader and this is because the Robots are buying and selling daily.
So some of the Robots will buy in the morning. Then they will sell in the evening or in a few hours time. Others will just hold the trade for a few days and they will sell it. That is why we keep the low fee here.
And the difference, as well, here is that on the Coinbase crypto exchange, or on the other cryptocurrency exchanges we cannot trade with Robots so that’s one of the differences. If you trade with crypto brokers, you can trade with Robots.
That’s what we do. And if you buy coins on the crypto exchange, you cannot do automated trading.
The other difference is that with the crypto brokers you don’t physically buy and this is something that many beginners don’t understand. When you trade on the crypto broker platform, you don’t physically buy the asset.
Especially for the cryptos, it’s very hard to say it physically. But let’s call it physically because we can still put it in a Ledger for example. we can put actual cryptos on a Ledger, on a device, for example.
Ledger is a hardware wallet for cryptos that we use and it’s a very secured one. So on the crypto broker, what we have is not actual coins that we buy and sell.
CFD or The Contract for Difference at The Crypto Broker
At the crypto broker, we trade CFD contracts, which is called so because it stands for Contract For Difference. Contract For Difference means that every time we buy a Bitcoin, we make a contract with the broker that if the price goes up, we will benefit from that difference. If the price goes down, we will lose that difference. This is called CFD trading.
So we don’t actually purchase Bitcoin or any other coins with the crypto broker, we don’t purchase EUR, we don’t purchase gold. It’s CFD trading.
And this is a very popular method of trading and especially for Bitcoin.
After that in 2018 was the best time to use crypto brokers. You know why? Because the Bitcoin was crashing. It was just that stone falling down and with the crypto brokers, you have the option to sell even if you haven’t bought it previously.
So how it works? We fund an account with the crypto broker. For example, we funded a $10,000 account and we can use these $10,000 to sell something on there, the Bitcoin. Remember, we’re talking about Bitcoin in 2018. And we can benefit from the difference if the price falls.
So if the price falls from $10,000 to $6,000, if we sell on $10,000, we will benefit from this difference of $4,000. Even if we didn’t buy anything previously, even if we didn’t have any coins previously.
Different Trading Methods
That’s the difference between trading CFD and when trading on the cryptos. So which method we would suggest to you? Depends on what you want to do, we do both.
On the crypto exchange, you invest in cryptocurrencies. You buy and hold them for a longer time. With the crypto broker, you trade personally with Robots – you are buying and selling daily, and you pay much lower fees.
And, one more time, on the crypto brokers that offer the MetaTrader platform, it is allowed to do automated trading with the Robots. For the Bitcoin.
So one of the disadvantages of crypto brokers is that they don’t offer a lot of assets. Usually, they have just Bitcoin, Ethereum, Litecoin, and Ripple. That’s what we’ve seen with most of the crypto brokers. While on the crypto exchange you can buy many cryptocurrencies.
It’s a matter of time until the crypto brokers start offering more cryptos on MetaTrader that we can trade with Robots or manually.
FCA Regulated Cryptocurrency Brokers and Non-FCA Regulated Crypto Brokers
But something interesting we learned a few days ago is actually that the FCA regulated brokers are going to remove CFD trading from MetaTrader which was quite surprising. We still don’t know why they took that action.
Even they lowered since 2018, there was the ISMA restriction that lowered the leverage to 1 to 2 for cryptos in Europe which is 1 to 2. Traders were used to 1 to 100, 1 to 200-500, and they lowered to 1 to 2 which means that we really need a lot of capital to trade Bitcoin with a crypto broker.
And now, they just ask all the FCA-regulated crypto brokers to remove coins from their platforms. So we guess the only solution will be to trade with non-FCA regulated crypto brokers which is something we personally don’t want to do.
But from January 2021, this may be the only way to go for algorithmic trading with Bitcoin. Non-FCA regulated crypto brokers and MetaTrader.
Still, there are other regulations, of course, but FCA for the moment is like the strictest regulation for the Forex & crypto brokers. And if you’re using a crypto broker with MetaTrader, make sure it’s regulated. That’s super important, Make sure to have FCA, Sysec, in every region, it’s a different regulator.
So make sure you check which is the regulator for your country and choose a regulated broker. Same with the crypto exchange. Coinbase is a regulated and licensed cryptocurrency exchange, for example. That’s why we initially started using it and we saw it’s super friendly and super easy.
That’s one of our longest courses on Coinbase because it’s very easy even for beginners to start with Coinbase. So always go for the regulated crypto brokers or crypto exchanges.
So these are the major differences between crypto exchange and the crypto broker. If you have any questions, drop them in the comments below. See you in the next lecture.