What is the difference between a crypto exchange and a brokerage?

Differences in Operational Models

1. A crypto exchange operates as a platform where buyers and sellers trade digital assets directly, often through an order book system that matches buy and sell orders. The exchange does not act as a counterparty to the trade.

2. In contrast, a crypto brokerage functions as a direct seller or buyer of cryptocurrencies, setting its own prices and acting as the counterparty in every transaction.
3. Exchanges typically offer a wide variety of trading pairs, allowing users to trade between different cryptocurrencies or between crypto and fiat currencies.
4. Brokerages usually limit trading options to purchases between fiat and major cryptocurrencies like Bitcoin or Ethereum, focusing on simplicity for new users.
5. The exchange model emphasizes liquidity and market dynamics, while the brokerage model prioritizes ease of access and fixed pricing.

User Experience and Accessibility

1. Crypto exchanges often require users to go through a more complex onboarding process, including identity verification and understanding of trading interfaces.

2. Brokerages streamline the purchasing process, allowing users to buy crypto with credit cards or bank transfers using intuitive apps or websites.
3. Exchanges may offer advanced tools such as limit orders, stop-losses, margin trading, and API access for algorithmic strategies.
4. Brokerages typically provide fixed prices at the time of purchase, shielding users from order book volatility but often including higher markups.
5. The target audience for exchanges includes active traders and experienced investors, while brokerages cater to beginners and casual buyers.

Pricing and Fee Structures

1. On a crypto exchange, prices are determined by supply and demand, reflected in real-time on the order book, leading to potentially tighter spreads for high-volume assets.

2. Brokerages set their own rates, often bundling fees into the quoted price, which can result in less competitive pricing compared to open markets.Exchanges generally charge lower fees, such as maker or taker fees ranging from 0.1% to 0.5%, based on trading volume and user tier.
3. Brokerage fees may appear as flat percentages or convenience charges, sometimes exceeding 2% per transaction, especially for instant purchases.Some brokerages also lack transparency in pricing, making it harder for users to assess the true cost of acquisition.

Security and Custody Considerations

1. Most exchanges allow users to withdraw their assets to private wallets, giving them full control over their private keys.

2. Brokerages often retain custody of assets unless explicitly transferred, meaning users do not fully own or control their holdings until moved.
3. Exchanges that support non-custodial trading, like decentralized exchanges (DEXs), eliminate the need to trust a third party with funds.
4. Brokerage platforms may integrate insurance or custodial safeguards, but these do not replace the security of self-custody.
5. The risk of platform insolvency or operational failure is present in both models, though exchanges with transparent reserve audits may offer greater accountability.

Frequently Asked Questions

Can I trade altcoins on a crypto brokerage?Most brokerages support only major cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and occasionally a few others. Altcoin selection is extremely limited compared to exchanges, which list hundreds of tokens.

Do crypto exchanges offer customer support like brokerages?Support quality varies widely. Some exchanges provide robust customer service, while others, especially decentralized ones, offer minimal or no direct support. Brokerages often prioritize user assistance due to their retail-focused model.

Are brokerages safer than exchanges for beginners?Brokerages can appear safer due to simplified interfaces and purchase guarantees, but safety depends on the platform’s reputation, security measures, and whether users eventually transfer assets to self-custody.

Can I use both an exchange and a brokerage simultaneously?Yes, many users leverage both. They may buy crypto through a brokerage for convenience and later transfer it to an exchange for broader trading options or lower fees.