Crypto Exchange Vs Broker: Key Differences for Users and Business Owners

Cryptocurrencies are on the way to become the world’s traded asset class as their popularity is rapidly gaining momentum among both traders and investors. When talking about crypto trading, users have two options to select: crypto brokers and crypto exchanges. Both options have a set of pros and cons. Here is why, what is the best solution for a crypto trader/investor and a business owner.

Key takeaways:

• What are the differences between crypto brokers and crypto exchanges?
• What is the best solution for a crypto trader?
• Which option is the best one for a crypto investor?
• What is the easiest way for a business owner to enter the crypto trading market?
• Launching a crypto exchange and a crypto brokerage company: how much does it cost?

The Key Differences Between Crypto Brokers and Exchanges

To understand the key differences between a crypto broker and a crypto exchange, we need to understand first what is the role of each type and how it functions.

What is a Crypto Brokerage Company?

A crypto brokerage company acts like an intermediary between a crypto trader and a crypto market. Traders do not buy or sell digital currencies directly, they get access to CFD contracts instead.

CFD (Contract for Difference) is an agreement between a trader and a brokerage company. When users decide to close a deal, they get the difference if the underlying asset’s price moves in the right direction or pay the difference if its price goes in the opposite direction.

Let’s dive into such an agreement deeper. For instance, a trader signed up for a brokerage company and needs to buy 10 ETH ($2700 per one coin). He needs to understand the price movement he predicts – let’s pretend that a trader is waiting for the asset’s growth in the near future.

• A trader opens a long position for 10 ETH which means that he “kind of” bought it. In fact, a trader doesn’t get any Ethereum tokens on his balance.
• A CFD contract remains open until a trader decides to close the position.
• A brokerage company compares the current price of the underlying asset with the price at the moment of opening the position.
• For instance, the price of Ethereum was $2700 per coin and now the asset is traded at $3100. A trader gets the difference ($400 * 10 = $4000) on his balance. When the Ethereum price is $2500, a brokerage company takes the difference ($200 * 10 = $2000) as compensation.
• The mechanisms of how CFD contacts work is exceptionally easy to understand.

Here is why, a crypto brokerage platform unlocks access to a trading platform where traders are able to open long and short positions, monitor real-time prices of cryptocurrencies, use diverse analytical instruments, etc. Meanwhile, traders cannot purchase crypto assets “physically” and they withdraw them, sell, or transfer to other wallets.

What is a Crypto Exchange?

Under the term “crypto exchange” traders understand a platform that enables users to buy and sell digital currencies “physically”; which means a trader gets a certain amount of coins/tokens on his balance.

For instance, a trader needs to buy 10 ETH. He creates an order and waits for it to be executed. 10 Ethereum tokens are sent to his exchange wallet, and a trader is free to do whatever he wants: sell cryptocurrencies through the P2P mechanisms, transfer ETHs to other wallets, lock his coins and get passive income, etc. There are multiple ways of using digital assets a trader has purchased on a crypto exchange.

When talking about a crypto exchange, the platform is responsible not only for buying/selling processes, but should guarantee safe storage of its users’ crypto funds. Top-rated platforms hold 80-90% of the overall assets on cold wallets so that cybercriminals could not steal them.

The Main Differences Between Crypto Exchanges and Crypto Brokerage Companies

We have already mentioned the ways how crypto brokers and crypto exchanges function. Let’s sum up the differences.

Access to funds for a trader

• Crypto brokerage company. Traders do not access crypto funds directly, they “sign” Contracts for Difference and either get the difference or pay it after closing a position.
• Crypto Exchange. Traders buy and sell crypto assets, get them on their balances, and can do anything they want (sell, transfer, withdraw, send to different pools, and so on).

Array of digital currencies

• Crypto brokerage company. Brokers usually unlock access to top-rated digital currencies only.
• Crypto Exchange. Exchanges list a lot of digital currencies including newly released ones. Top-rated platforms offer more than 1000 cryptocurrencies.

Liquidity

• Crypto brokerage company. The liquidity depends much on the number of active traders and on the chosen asset.
• Crypto Exchange. Crypto exchanges guarantee the highest liquidity.

Regulation

• Crypto brokerage company. Most brokerage companies are regulated by top-rated institutions (SEC, CySEC, FCA, etc.).
• Crypto Exchange. Many crypto exchanges are licensed outside the strictest jurisdictions.

Safety

• Crypto brokerage company. Traders cannot lose their assets because of stealing because in fact, they do not own those funds.
• Crypto Exchange. Sometimes, crypto exchanges undergo hacks that lead to outflows of giant capitals.

Interface

• Crypto brokerage company. Brokerage companies are usually as simple and understandable as possible.
• Crypto Exchange. The interface may depend on a platform but crypto exchanges are frequently somehow difficult for newcomers.

Passive income instruments

• Crypto brokerage company. Brokerage companies rarely offer additional instruments.
• Crypto Exchange. A crypto exchange usually offers staking, options, copy trading, launchpads, and other passive income instruments.

Analytical tools

• Crypto brokerage company. Brokers provide their clients with a broad scope of analytical instruments and tools so that they could predict whether the price will go.
• Crypto Exchange. Crypto exchanges usually unlock basic analytical tools only.

What is the Best Solution for a Trader?

Which type of a crypto trading platform should choose a trader? Let’s think about what is the most important for the vast majority of traders.

First and foremost, traders need to be sure their funds are protected enough and cannot become the target of hackers. Furthermore, traders expect to access the fullest scope of analytical tools and instruments to analyze the crypto market properly.

Hence, a crypto brokerage platform seems to become the best solution for a trader. When talking about the cons, traders may face the limited array of assets they can trade, but the wide range of advantages levels it out.

What is the Best Solution for an Investor?

As for investors, they have some other goals compared to traders. Crypto investors expect to find a platform where they can easily buy, sell, and hold digital currencies. The array of crypto assets is an important criterion from the viewpoint of the portfolio diversification.

Crypto exchanges provide investors with the ability to transfer their funds wherever they want. Furthermore, investors can utilize additional earning instruments – for instance, one can buy digital assets and then utilize the staking mechanism to get passive income.

A crypto exchange is a much better option for investors who are going to hold digital assets for a long period of time.

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Which Option is the Best for a Business Owner to Enter the Crypto Market?

Crypto trading is a plum for newcomer businesses, as the sector just commences gaining momentum. Which path should a business owner choose to pave to enter the market? Let’s compare the procedures required to launch a crypto brokerage business and a crypto exchange to understand what is the easiest way to run your own business.

How to Launch a Crypto Exchange: Key Steps

When a business owner is going to run a fully functional crypto exchange, he faces the following steps:

• Run a company. First and foremost, business owners need to found a company which will become the legal basis of your future crypto exchange.
• Get a license. Unlicensed crypto exchanges can exist theoretically but they have no chance to attract crowds of traders. The more powerful your license is, the better – top-rated platforms are licensed by CySEC, FCA, ASIC, and other world-known regulators.
• Integrate high-end software. After the legal issues a business owner needs to integrate an order machine engine that is powerful enough to process transactions as quickly as possible. Top-rated platforms are equipped with engines that process more than 10,000 per second with the processing time from 0.05 msec.
• Provide traders with functional and ease-to-use interface. A crypto exchange needs to be both simple and functional. Do not overload your interface – let users find all the necessary features in several clicks. Pay special attention to the mobile app as the vast majority of traders and investors use mobile devices to access financial markets.
• Guarantee the highest security level. Utilize cold wallets to hold crypto funds. Furthermore, ensure your users that a platform uses the latest security protocols and corresponds to the highest standards.
• List as many assets as possible. Crypto exchanges need to find the golden middle – on the one hand, they should provide investors with access to diverse cryptocurrencies, and on the other hand, an exchange shouldn’t let scam coins penetrate into the platform.
• Add additional analytical tools and earning instruments. The more functional your platform is, the better.

Here are the key steps for launching your own crypto exchange but a business owner may face a number of pitfalls that depend on the jurisdiction, target audience, etc.

When talking about expenses, the procedure may cost up to $500,000.

How to Launch a Crypto Brokerage Firm: Key Steps

In case of launching a brokerage company, business owners need to undergo the following steps:

• Business planning and market research. Work out a thorough plan that includes the type of a brokerage company, target audience, and financial/geographical limits. Choose the business model (STP or ECN).
• Run a company and get a license. Top-rated jurisdictions are highly recommended if you are going to become the leader of the sector.
• Build a website and a trading platform. Taking into account the high level of competition in the niche, traders are rather demanding. When signing up to a brokerage company they expect to get a functional website that is easy to use for both beginners and professional traders.
• Partner with Prime of Prime liquidity providers. This step is exceptionally important to provide your future clients with the best trading conditions.
• Build promotion and marketing campaigns. A well-designed website and a functional platform will bring you nothing without high-end promotion. In the scope of the fast-growing competition, you need to pay enough attention to marketing.

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When talking about expenses, the whole launch process requires from $160,000 to $500,000; meanwhile, business owners may select another option. One may launch a brokerage company through the WL (White Label) model; which means you get a ready-made platform that is already licensed and doesn’t need the above-mentioned steps. Providers of WL solutions enable business owners to make their first steps just within weeks, not months. Furthermore, the expenses will be much lower.

Hence, launching a crypto brokerage company can be much easier when a business owner uses a “secret bonus” represented by the WL model. For crypto exchanges there are no such privileges.

The Bottom Line: Crypto Broker Vs Crypto Exchange

Crypto brokerage companies and crypto exchanges cannot be compared within one and the same paradigm. Those types are different and oriented to different audiences; meanwhile, a crypto brokerage model is much easier for beginner business owners who want to make their first steps in the crypto trading market – especially, when they utilize the White Label model.