Offchain: Trading your magic Internet money: Brokers & Exchanges

Offchain: Trading your magic Internet money: Brokers & Exchanges

Learn about the key differences in these trading venues and which one might suit your needs.

Chances are that you didn't get into crypto because someone magically appeared in front of you and sold you Bitcoin - even though the magic internet money meme would suggest so.

The magic internet money meme came up as the first meme to promote Bitcoin and has survived to this day.

Instead you probably bought your first crypto on an exchange. Or maybe it was a broker? Let's explore what both are since it's good to know what you're dealing with - in crypto, as in life.

What's a crypto broker?

Just three letters separate crypto bro from crypto broker. Yet, one is useful, while the other primarily posts memes on Twitter or shills their bags.

A Safely Endangered remix

Crypto brokers are similar to traditional brokers. They mediate between traders and the market. When you trade through a broker, the broker connects to one or more crypto exchanges. As an intermediary between parties, brokers rely heavily on customers depositing cryptocurrencies with 3rd party exchanges.

That means trading on a broker is roughly as direct as when a Japanese person says they'll think about it after you invite them. For those unfamiliar with Japanese people, it means "no".

A result of this structure is that brokers hold most of their cryptocurrencies on other exchanges, which they don't always disclose. When FTX went bankrupt, the broker Digital Surge lost $33 million of its client's funds because they were stored on FTX. While it seems they will survive the fallout, traders still have their funds locked with uncertainty about when they'll regain access.

What about exchanges?

It's in the name; you go to an exchange to exchange your crypto. Unlike trading on a broker, cryptocurrencies on exchanges are directly integrated into their platform. That means a big headache for poor developers whenever a new native blockchain needs to be integrated. The upside is that the exchange controls its hot and cold wallets without needing to rely on a third party cryptocurrency exchange.

Instead of trading with one big counterparty, exchanges bring together everyone wanting to trade crypto and match them using their matching engine. While that might sound like you'll have to wait to fill your orders, it depends on the order type you use. Normally, exchanges will ensure that buying and selling at market price is smooth, thanks to agreements with market makers. And since it's the market defining the price on exchanges, traders can better capitalize on opportunities compared to when using brokers.

Centralised exchanges also tend to have lower fees than brokers, but brokers can provide a wider range of cryptocurrencies for trading.

So which one should I use?

Like everyone in crypto, none of us is giving financial advice.

Which type of platform you want to use is ultimately down to preference and what you're trying to accomplish.

You should be aware of the risks with brokers since they will draw all their liquidity from external sources that they don't control nor disclose. These sources can be based outside of Australian laws and regulations. Therefore, doing your due diligence on a broker can be challenging.

Exchanges, in contrast, tend to be in full control of your crypto in jurisdictions that they are registered to operate in.

Whichever you choose, not putting your funds in one basket is a good start to hedging your risks.

Enjoy the ride, and remember the only trading strategy you need: buy low, sell high.

- Naomi from CoinJar

Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong. Take 2 minutes to learn more:

Cryptoassets traded on CoinJar UK Limited are largely unregulated in the UK, and you are unable to access the Financial Service Compensation Scheme or the Financial Ombudsman Service. We use third party banking, safekeeping and payment providers, and the failure of any of these providers could also lead to a loss of your assets. We recommend you obtain financial advice before making a decision to use your credit card to purchase cryptoassets or to invest in cryptoassets. Capital Gains Tax may be payable on profits.​​

CoinJar’s digital currency exchange services are operated in Australia by CoinJar Australia Pty Ltd ACN 648 570 807, a registered digital currency exchange provider with AUSTRAC; and in the United Kingdom by CoinJar UK Limited (company number 8905988), registered by the Financial Conduct Authority as a Cryptoasset Exchange Provider and Custodian Wallet Provider in the United Kingdom under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (Firm Reference No. 928767).