Cryptocurrency brokers vs exchanges: What’s different?

Published on
Friday, April 13, 2018
Traditional cryptocurrency exchanges are popular among the average crypto trader, but it becomes less viable for larger amounts.

You’re ready to purchase cryptocurrency, but what are your options? The traditional cryptocurrency exchanges are popular among the average crypto trader, but it becomes less viable for larger amounts. These higher volume trades are where a cryptocurrency broker can become a better option.

What is a cryptocurrency exchange?

A traditional cryptocurrency exchange works much the same as a stock exchange, with buyers and sellers trading based on the current market price of the cryptocurrency. The exchange acts as the middle-man, usually charging a fee for each transaction. Some will exchange fiat (like AUD or USD) for cryptocurrency, whereas others only exchange between different cryptos.

What is a cryptocurrency broker?

With a cryptocurrency broker like HiveEx.com, your funds are traded via a dealer network, as opposed to a centralised exchange, and is referred to as an over-the-counter (OTC) market. These brokers find sellers or buyers who individually hold large pools of crypto, and pair them for the sale. It ends up being more flexible and more convenient, with a settlement period that is generally faster than an exchange.

So how do the two compare?

Let’s compare the two – if you were to buy a certain amount of cryptocurrency on a traditional exchange, contrasted with an OTC broker. In our Cryptocurrency Exchange Landscape Report, released in March 2018, we performed a comparison between the highest volume Australian cryptocurrency exchange, BTC Markets, and our OTC service, HiveEx.com.

Going by the available trade limits on BTC Markets’ sell order book, the scenario we chose was AU$407,400.62 worth of BTC. On the exchange, it took 46 individual transactions to trade – the number of transactions can vary, depending on the available trade orders. BTC Markets also charges a 0.23% fee, which returned 34.31 BTC in total.

If we compare this to going through a cryptocurrency broker at HiveEx.com, only one transaction would be needed, which returned 35.03 BTC. This 0.72 BTC difference was worth AU$8,404.34 at the time the research took place. For such a large exchange, the difference is obvious. But what about a smaller trade?

For a trade that’s only worth, say, AU$5,000, the price quote from the broker wouldn’t end up being better than the exchange. For cryptocurrency trades below AU$50,000, there’s no real benefit. This is because of slippage.

How does slippage work?

In volatile markets like crypto, slippage happens. It’s the difference between the price you’re expecting on a trade, and the price you actually get. This can mean a higher price when buying cryptocurrency, or a lower one when selling. Slippage happens due to the fact that on an exchange, different sellers want different prices for their coins. When an order is placed, it runs down the book from cheapest price to most expensive. That difference in price between orders is what the slippage is.

If you’re buying a small amount of cryptocurrency, this won’t have an affect. It’s when you’re buying larger volumes that slippage increases with the more you want to buy, as you have to go further down the order book.

On an OTC desk, slippage is avoided by everything being sold at the one rate. The broker can find sellers or buyers who individually hold large amounts of crypto and pair them for the sale.

Which one should I use?

When trading cryptocurrency that’s worth less than AU$50,000, an exchange often works out fine. There’s no hard and fast rule, however. But for larger trades, an OTC desk is more likely to provide a better price for all parties involved. When it comes down to it, what solution you go for depends on the nature and magnitude of what you want to do.

Written by
Harry Tucker
Business Manager

Crypto bull, trader, and long term fan of Dogecoin.

harry.tucker@hiveex.com

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HiveEx.com HQ is located in Sydney, Australia