Erik Weijers, 10 months ago

Broker versus Exchange: what is the difference?

Many beginners wonder what options they have buying their first crypto. The obvious places to start are a broker or an exchange. What is the difference and what would work best for you?

There are a lot of different services that make sure there are vibrant markets in the crypto industry. They pretty much mirror the players that exist in the traditional markets. It's like an ecosystem: in some cases, one part could not even exist without another part.

Let’s take a look at a couple of examples:

  • Crypto brokers: easy entry for retail investors to buy crypto
  • Crypto exchanges: more advanced trading options for retail investors
  • Market makers: provide liquidity, often big banks of financial institutions
  • Custody providers: store your crypto without the intent of trading

While custody providers and market makers are companies that offer their services in the background, (crypto)brokers and exchanges are services work directly with retail customers.

In this article, we will focus on brokers and exchanges.

What is a crypto broker?

A broker is a highly regulated firm that offers to buy or sell cryptocurrencies for fiat money (euros, dollars, etc). A broker offers a service and sets a price. It usually has a very dedicated helpdesk.

So a crypto broker will allow you to deposit euros and buy Bitcoin or other cryptocurrencies. And most brokers give direct access to a broad number of other cryptocurrencies for its customers. A broker is also an important place if you want to exit the market. That is because a broker gives you the opportunity to sell your crypto and cash out to your bank account.

What is an exchange?

Exchanges act as intermediaries between buyers and sellers. They offer trading pairs and let the market sort out the price. In some cases in the worldwide crypto market, they are less well regulated by financial institutions.

Let's say you want to exchange some BTC for ETH or vice versa. An exchange offers the so called BTC/ETH trading pair for this purpose. Crypto exchanges will also have trading pairs of one or more stablecoins and 'non-stable' crypto. This allows users to take profit without cashing out to their bank account.

Some crypto exchanges will also allow traders to access margin trading and derivatives. Others are classic spot market exchanges (spot meaning: immediate change of hands of a financial asset).

What is the difference between a broker and an exchange?

Exchanges use order books to let supply meet demand. In the case of decentralized exchanges, they use liquidity pools for each trading pair. It results in a dynamic, ever-shifting price.

A broker uses a very different model. It sets a price for the customer to buy or sell. The advantage of that model is a fixed price that is not influenced by the order size. The broker ensures that the trader can buy or sell a position without slippage and get the price that he is asking for. Also, most brokers focus on the trade versus fiat. Meaning that they don’t offer BTC, ETH or any other non-fiat trading pairs.

Which should I choose?

For beginners, a broker is the least overwhelming place to start. Most retail customers have no experience trading cryptocurrencies, or any other market for that matter. Exchanges offer professional tools for technical analysis and a variety of order types to trade the market under different conditions. However, these tools require knowledge and skill to be used successfully.

Having said that, there are also quite a lot of exchanges with an easy and simple user interface.

Once having bought your first cryptocurrency you can store your assets on an exchange or brokerage - or transfer them to your own wallet. Once in profit or when you want to sell, the broker (and some exchanges) will offer you the opportunity to exit the market.

A more advanced user might like to use different platforms to get involved into derivatives or options markets. These are highly complex and risky products that can either be used for speculation or hedging an already existing spot position. But even an advanced trader will likely use the services of a broker to enter and exit the market. Many exchanges don’t even offer the option to buy with euros or sell for cash- in on your bank account.

What is LiteBit?

LiteBit is traditionally a crypto broker and has now a spot exchange in beta. The latter is available in The Netherlands and Belgium and will roll out to more countries. You can sign up here.

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