How to buy cryptocurrencies: Coinbase, Coinbase Pro, Kraken, Bitstamp vs Brokers
15 min Beginners Intermediate
Do you want to own cryptocurrencies or make money trading cryptocurrencies? The answer to the question above leads to the solution. When you buy cryptos on an exchange, you own them, and when you do that on a broker’s platform, you have superiors tools to speculate on the price in both directions.
There are several other differences between the two, but before taking a closer look, it is important to mention a third way to approach cryptocurrencies: peer to peer trading. In P2P, a buyer and seller set the price between themselves. These kind of transactions are not trades placed in the open market but rather an operation more suitable for the Whale class of the crypto world, or if you wish, the sharks. Trading outside markets is not appropriate for ordinary mortals.
Now, let us get back to the exchange vs. broker debate...
Ownership vs. trading
A digital coin is a virtual asset, but you can still own it if you trade on an exchange. Possessing a cryptocurrency means you are entitled to various benefits that each coin offers, and you can also participate in determining the future of the currency. If you intend to hold (or HODL) the cryptocurrency for an extended period in anticipation for a high return or other benefits, a crypto exchange is what you are looking for.
But if you seek to speculate on the price of the cryptocurrency and are not interested in any long-term impact or benefits, a broker would do just fine. Traders, especially for shorter periods of time, would find a broker more appealing.
Buying or also selling
This point is related to the previous one, but it is worth its own space. On crypto exchanges, when you speculate on the price of the currency, you buy at a certain price and hopefully sell it at a higher price. You make money by buying low and selling high. Sounds pretty basic, right? You can do that with your broker as well, but you can also go the other way around.
By trading with a broker, you can go short on a cryptocurrency, the same way you would go short on a stock or a currency pair. That means you first sell the coin at a high price and later close the position by buying the coin at a lower price. Only a few stock traders do this while the majority purchase low and intend to sell the equity at a higher price. Yet in the world of forex, this is very common.
So, if you only want to profit from gains, there is no difference between exchanges and brokers. But if you're going to make money also by the falls in the prices of cryptos, brokers are the way to go.
best brokers to trade crypto
$3-4 Billion on shorting the subprime market
Paulson and co., the eponymous hedge fund, made between $3 billion to $4 billion by betting against subprime mortgages, and, in fact, the US housing market.
While there were a few gloomy prophets, most market participants did not see the Great Financial Crisis of 2008 coming. Paulson not only saw it, but also made a hefty profit when prices were falling.
Fees vs. commissions
The fierce competition between cryptocurrencies is advantageous to their customers: spreads between the price of buying and selling the coins is narrow and sometimes non-existent. This is entirely different from the situation at forex brokers, which offer tight spreads on popular currency pairs but quite broad ones when it comes to digital coins.
So do exchanges have an advantage here? Not really. The answer becomes complicated when adding fees into the equation.
If you made a decent profit at your crypto exchange and want to withdraw the funds, you may run into a fee. If you are unhappy with your exchange and wish to move your digital assets to another one, another fee applies. The situation is much better with brokers, which generally do not charge such fees.
So what is the verdict? It is essential to calculate the spreads and fees at each provider and compare the costs before making a decision.
The simplicity of access vs. lots of currencies
Forex brokers make it easy to sign up and open an account. The better ones offer high-quality customer support as part of their retention schemes. They have a lot of experience with these processes. The experience also comes handy when it comes to trading. Brokers usually offer modern, up to date platforms that allow sophisticated technical analysis charts that can either be the industry-standard MetaTrader ones or proprietary ones.
The smooth onboarding is not common to crypto-exchanges, to say the least. The exchange may demand copies of various personal documents and take its sweet time with verifying them. Also, the process of creating a wallet can be cumbersome to many. It takes time and effort to get started. In addition, some cryptocurrency exchanges do not accept fiat currency. In addition to creating a wallet and passing through the lengthy process of signing up to an exchange, you may also need to first buy Bitcoin (or Ethereum) at another exchange and then transfer the coins to the desired exchange.
So are brokers winners here? It depends on which cryptos you want to buy. Brokers usually offer a limited set of digital currencies such as Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin. Some venture into additional coins down the market cap list, but very few offers more than a dozen. Crypto exchanges already provide a far broader array of currencies, reaching thousands. If you wish to trade the coins that you purchased in an Initial Coin Offering (ICO), it will typically be available on a few exchanges within a short period, while a broker would only begin to consider it after long months.
You are trusting your money with someone else, and that money needs to be secure, regardless if this is fiat or crypto. There is no question about that.
Horror stories about hacks into cryptocurrency exchanges are unfortunately familiar. Japan’s Mt. Gox went bankrupt, and the consequences are still felt. The hack into Coincheck was also quite a rollercoaster for holders of NEM. And there are too many cases of long periods of “maintenance modes” within exchanges, where clients have no access to their coins in a market that is open 24/7.
Forex brokers are not that immune either. Negative slippage still rears its ugly head. Besides, several brokers were bankrupt or chased their clients for negative balances after the infamous “SNBomb” - the sudden removal of the 1.20 peg for EUR/CHF. Complaints about the closure of positions when the price was far from the stop-loss points also exist.
And if the exchange or the broker mistreated you, can somebody help? Cryptocurrencies are not regulated, but things are undoubtedly in motion. In the world of brokers, some are regulated by trustworthy authorities such as the US CFTC, the British FCA, the Australian ASIC, and a handful of other highly regarded bodies. However, some brokers are unregulated or regulated in jurisdictions which are quite loose.
All in all, both crypto exchanges and brokers are not immune to issues. Check out the track record and the reviews for each provider before making a choice.
Warning: When explanations about “maintenance mode” are cloudy, it’s time to worry
If an exchange enters maintenance mode as prices rise and the systems are overwhelmed, it is frustrating, but not the end of the world. However, when officials explanations are absent, it may be a good time to worry. And if you try to contact support and what you see is “Our support ticket queue is full. Please, come back in a few hours”, things are getting worse.
Apart from worrying, you can search the web for similar complaints by clients of the exchange. Just search for the name of the exchange and the word maintenance. You can also post your own experience and see if others share it. It is easier to battle a crypto exchange when you join hands with other customers.
Fork opportunities vs. Margin opportunities
Forks are friends, not food - Paraphrasing a line from the movie “Finding Nemo,” hard forks in bitcoins usually consist of an issuance of new coins and an upgrade of the system. These hard forks are announced in advance and provide opportunities for holders of cryptocurrency holders to profit by taking advantage of one path or the other. You can take advantage of the forks only if you own the cryptocurrency - only if you trade on an exchange.
On the other hand, trading with a broker opens another opportunity to profit using margin. In the European Union, leverage on digital coins is limited to 2:1. You can trade on double the amount you deposit. This is still double than 1:1, or no leverage, offered by crypto-exchanges. In other jurisdictions, leverage may be much higher. Making higher profits on rises or falls in the values of cryptos is an opportunity available with brokers.
Which option is better? That depends on what you are looking for.
There are quite a few differences between crypto exchanges and brokers. Some variations like ownership vs. trading, only buying vs. also selling, simplicity vs. options, etc., are quite clear. The differences in cost structure and security depend more on the individual entities you compare on both sides of the aisle.