Should you be using a crypto broker in your trading? Image credit: AdobeStock
In life, we’re often told to cut out the middleman, and yet sometimes it can be beneficial to leave them in.
Everyone has their own opinion on the matter, but clearly there are obvious advantages of going through a broker, particularly if you are new to trading or lack the time to go through the buying and selling process firsthand.
In crypto trading, the exchanges can be a complex and confusing place at times, and some still have rather questionable security measures in place to this day despite the huge numbers of traffic and liquidity that flow through them. In fact, the Wall Street Journal has called for a complete ban on cryptocurrency in order to prevent costly ransomware attacks.
Is security like this the most appealing feature of a crypto broker?
Some observers have described crypto exchanges as a sort of digital Wild West — almost anything goes, and not all of it is positive.
A trading broker, and one that offers a wide range of assets and instruments, is likely to be regulated in some way. This is not an issue for crypto exchanges, which can open their doors with little or no obligation at all.
Take eToro, for example. You can trade crypto via this broker safe in the knowledge that they are FCA, CySEC and ASIC approved, with all client funds held in segregated accounts at Tier 1 banks. That’s the kind of peace of mind that a crypto exchange can’t deliver.
So is eToro any good? Everyone will have their own opinion on brokers like it, but fundamentally they offer confidence and trust, not watchwords you can necessarily associate when trading crypto direct with an exchange.
When you trade at a crypto exchange, you need to be mindful that low liquidity — fewer people investing — can lead to higher spreads, which affects how much of a profit you will take when closing a position.
Crypto brokers, on the other hand, have a higher liquidity pool to play with, and that means not only can you secure the best buy rates, but your sell price will also be aided by lower spreads than you might find on crypto exchanges.
The issue with an exchange is that you need to find a buyer/seller to pay the price you want. That is not always possible. Brokers have access to a wider range of resources across the exchanges and private investors that they work with.
As you probably know already, when you buy crypto from an exchange, you actually own the currency. You can choose to store it on the exchange, a risky business in this hack-friendly environment, or move it to digital or hardware-based storage, which is an extra cost and inconvenience.
When you buy crypto through a broker, typically you only own the underlying asset. As such, there’s no need for a wallet or secure storage facility as you don’t, technically, own anything tangible.
One of the primary functions of a stockbroker can be to offer advice and guidance to their investors as to when is the right time to buy or sell, among many other things.
A crypto broker acts in a similar way, offering the same kind of guidance to their clients. This guidance is typically based upon their account type and investment.
What’s more, joining a crypto broker is likely to add all kinds of other value too. You will be able to trade using a dedicated software platform, and you will have access to technical tools and charts and a whole host of analytical tools that can help take your trading to the next level.
While not necessarily advisable for everyone, leveraged trading helps you to access greater resources and, in theory, maximize your returns from a trade.
Tread lightly with leverage, that’s our advice, but this is another advantage that brokers have over exchanges. You can trade with a greater pool of resources, whereas at an exchange, it’s only the amount of investment you have that you can buy with.
One of the main criticisms of crypto brokers, and an area where exchanges had an edge, was in their timescale.
You can access a crypto exchange at any time and from anywhere. For a while, brokers stuck rigidly to their dedicated trading hours.
Now, many brokers let you access the markets 24/7 via their software and apps, and many will even assist you with 24/7 customer support.
Almost all the advantages crypto exchanges previously had have since been eroded, and that’s why you should only trade your favourite coins via a broker.