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Cryptocurrency Exchange vs Broker

Crypto brokers and exchanges are terms that are often used interchangeably. Although such platforms share many similarities, there are many differences too. It is a good idea for investors to understand what separates a broker and an exchange when deciding what route they wish to take when building their digital asset portfolio.

Key differences between a crypto exchange and a broker

Crypto exchanges

Crypto exchanges pair buyers with sellers using a central limit order book. Say someone wishes to buy Bitcoin at a market price of AUD $26,000. If someone is selling BTC at this price, the order book will match the two traders up to complete the transaction. Essentially, the order book records the prices that traders wish to exchange at. When the buyers and sellers agree on a price or meet in the middle, an exchange happens.

Crypto brokers

On the other hand, brokers monitor the market and act on instructions from their customers to buy or sell based on an estimate or quoted price that is generated from live market conditions. In that sense, we can think of brokers like a brick-and-mortar store that stocks and sells cryptocurrencies. 

View the best crypto exchanges in Australia.

What’s better: crypto exchanges or crypto brokers?

The Australian crypto community often considers exchanges as far superior to brokers. However, much of this misconception stems from the fact that most novice investors are unaware major trading platforms like Swyftx and Coinbase are actually brokers, not exchanges.

Exchanges and brokers both have unique advantages that may be suited to different individuals depending on their personal financial goals.

Advantages of crypto exchanges

The main benefit of using a crypto exchange will mostly be experienced by advanced investors. Exchanges are typically better for day traders, as these platforms often contain advanced charting tools and information such as market depth. This becomes especially important during fast-moving trends, as an exchange market will likely react faster and create more profit opportunities for traders. 

Additionally, high-volume and high-frequency traders may find a crypto exchange slightly more cost-effective due to fee discounts, although this can vary significantly from platform to platform.

Advantages of crypto brokers

Crypto brokers are typically beginner-friendly and cheaper to use for investors buying smaller amounts of Bitcoin (or other digital currencies). Those looking to incrementally build a crypto portfolio, rather than spin a profit from active trading, will likely prefer a crypto broker. Brokers get to set their own price points, meaning there is no reliance on other traders to buy or sell digital assets. 

The key here is that if a broker only has customers willing to buy, they can still function and fill orders, whereas exchanges must have a somewhat equal amount of buyers and sellers to run smoothly. A broker could operate with one or one million customers (regardless of market direction) however an exchange with very few users would fail.

What does that mean and why does it matter?

Cryptocurrency daily trade volumes range between 20 and 30 billion – a tiny sum compared to the Fiat Forex markets that trade over 5 trillion across the same time span. The more people buying and selling, the more liquid an exchange is considered (for example Binance is one of the biggest exchanges, and therefore one of the most liquid). 

With greater liquidity comes lower spreads (the difference in buy/sell price) and less slippage (a price difference between when an order is placed and when it is executed). Every time a new exchange opens, it must populate all its trading pairs with buyers and sellers, further diluting the trading liquidity from existing exchanges and causing bigger spreads and more slippage.

How does a broker solve problems with liquidity?

Swyftx solves this problem by using smart order routing to distribute customer buys and sells across several of the top 100 cryptocurrency exchanges, starting with the most liquid first. Rather than relying on one order book – like an exchange – brokers like Swyftx can tap into the liquidity of many different order books. Due to this, Swyftx’s combined order book can potentially be more than 10 times more liquid than Binance’s. 

Every time a trade is made on Swyftx, the platform looks to see where the most liquidity exists for that asset and then splits the order across those exchanges to ensure the best market rate, lowest spreads and minimal slippage. 

Although brokers do charge a higher fee for being the intermediary in facilitating trades (like how a store connects suppliers and consumers), there is a lot more to consider than just the cost of an order. In some instances, higher trading fees on a platform like Swyftx will still be cheaper than an exchange’s “lower fees” due to savings on slippage and spreads. 

A unique advantage of a broker like Swyftx is the ability to trade any of the listed crypto assets (320+) against any of the listed base pairs (USD + BTC) without suffering liquidity losses. At the time of writing that amounts to over 60 tradable pairs. This isn’t always feasible on an exchange because every pair (e.g. BTC/NEO or USD/NEO) has its own order book, which means less and less liquidity for each asset for each pair that is introduced. Having the ability to trade all assets against USD (with the same liquidity) is a great way to manage slippage/spread risks and unify trades.

Risk management and security of crypto brokers

To be a successful trader you need easy-to-use, reliable and accessible tools at your fingertips. It is common knowledge that professional traders and investors should always put high importance on managing risk. These tools and risk management strategies can be difficult to manage across different platforms as no two exchanges have the same interfaces.

On the other hand, a broker like Swyftx simplifies the trading experience into one platform with support for Stop, Limit and Market orders. This means easy risk management and faster order execution. Pair this with the less chance of slippage and lower spreads, and it becomes easier for investors to know exactly how much they are paying to buy/sell a digital currency.

Brokers are often considered more secure than exchanges as they typically require stringent financial regulation to begin operating within the country. Swyftx, for example, is registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and abides by all regulatory requirements such as know your customer (KYC) and anti-money laundering (AML) laws. 

If you want to trade like a professional, manage risk, simplify your processes, trade/deposit/withdraw on one platform and save on fees/spreads then you need an account with a trusted exchange like Swyftx.

Written by

Ben Knight