Crypto Broker vs Crypto Exchange: What is Difference?
If you look at the discussions in many forums devoted to trading digital currencies, it becomes clear that many of their participants do not see the difference between crypto exchanges and brokers. And this difference is very big.
First, unlike crypto-exchanges, most of which were created a year or two ago, many brokerage companies have a long history. And if such a broker as, for example, FXOpen, has 15 years of work in financial markets and more than a million accounts opened by clients from almost a hundred countries, it gives certain guarantees of its reliability and speaks about its well-deserved positive reputation.
It must be said that over the years, cryptocurrency brokers have managed to hone their methods of fighting hackers. Thus, we regularly hear about the hacking of crypto-exchanges and thefts from the wallets of their clients, but nothing like that in relation to brokers so far has not been reported. Although their turnover is billions and tens of billions of dollars a month, and those who want to profit from them – abound.
Until 2017, brokerage companies mainly specialized in forex currency trading, precious metals, stocks and futures. But the hype of the growth of cryptocurrencies last year forced them to pay attention to this market, to which they had previously treated, let’s tell the truth, with a certain disdain.
Having come to the crypto industry, brokers have brought with them their trading arsenal, which in their capabilities, it should be noted, significantly exceeds the one that the exchanges provide. Let’s note only three fundamental points:
- the opportunity to earn both on the growth and fall of cryptocurrencies
- the opportunity to use a large leverage reaching 1:1000
- and the opportunity to use a huge toolkit for technical analysis and autotrading (automatic trading).
Now let’s focus on each of these points in a little more detail.
CFD or how to make money on a market crash
How to make money on the growth of cryptocurrency seems to be clear to everyone – bought a BTC for $ 10,000, then sold it for $ 20,000, and put 10 thousand profit in pocket.
But how to make money in a falling market? In theory, in order to sell something, you need to have something. That is, in order to sell bitcoin, you must first buy it. And so a person goes to the exchange, buys bitcoin for $ 20,000, then, after falling, in a panic sells it for $ 10,000 and … gets a loss of 10,000.
But that’s only if he trades on the stock exchange.
For a broker, instead of a loss, in the event of a market collapse, he may be in a serious plus. And all this thanks to Contracts for Difference (CFD).
Like much else in the world of finance, CFDs were invented in England about a quarter of a century ago. Initially, these were transactions for the purchase / sale of shares, but without registration of ownership rights to them, which made it possible to avoid paying duties.
It is clear that this “economical” way of trading quickly became very popular, as it allowed to get quite decent profit in a short time. And soon, in addition to shares, CFDs began to be concluded for other assets – currencies, precious metals and exchange commodities. And last year, thanks to brokers, cryptocurrencies also began to act as such assets. At the same time, as mentioned above, the actual transfer of coins from the seller to the buyer does not occur. This is what allows you to make money on a fall in prices.
Let’s clarify: a contract for the difference in prices is somewhat similar to a bet that you enter into with a broker as to whether the price of the same bitcoin will rise or fall.
In this case, you choose the moment of the beginning of the bet, that is, the time of opening the transaction, and the time of its closing. And its volume depends only on you and how long it will last – one minute, one year or longer.
And if at the moment when the price of bitcoin reached $ 20,000, you decide that this is the ceiling and then it will only fall, you can open a CFD deal to sell it, closing it at $ 10,000, you will no longer receive a loss, but a profit of 50 %. But that’s not all, because thanks to the 1: 1000 leverage, your profit can be not 50, but 50,000%!
Leverage: benefits and risks
Let us explain: leverage is the amount of credit funds that the broker provides to the trader automatically and without any collateral to conclude transactions on the market.
In case of success, the trader’s profit will grow in proportion to the leverage. But losses will also grow in case of failure. This is what divided traders into two camps. In the opinion of the former, high leverage entails an inevitable loss of the deposit, in the opinion of the latter, it is an excellent instrument for trading, which makes it possible not only to significantly increase your profits, but also, on the contrary, to seriously reduce trading risks.
It must be clearly understood that leverage is just an option, a bonus that you can use in full, half, quarter, one-tenth, or not at all. By itself, the amount of leverage does NOT affect the level of risk. Risks are managed by the trader himself, opening a position of a certain volume.
It’s like driving a car. Theoretically, sitting in it in the yard, you can accelerate your steel horse to 100 or 150 km / h in a few seconds. But you turn on your head and start moving carefully, assessing the possible risks. And when necessary and the situation on the road allows, you can drown the accelerator pedal to the floor.
Here’s a very simple practical example
Suppose you have allocated $ 1000 for trading on the exchange. At the current price of $ 10,000, with this money, without leverage, you can buy 0.1 bitcoin. (In reality, of course, you also need to take into account the commission of the financial intermediary). With a broker with a leverage of 1: 1000, you only need one dollar to buy this 0.1 BTC!
And you leave $ 999 out of your thousand in stock in case you made a mistake and the price went against you. In this case, having such an impressive reserve and using the method of averaging unprofitable positions and buying coins at a better price, you have many times more chances to get out of the drawdown with a profit, and not to zero your deposit. That is, the more leverage, the more free funds you have.
And the more available funds, the more opportunities for minimizing and diversifying risks and increasing the profitability of your trade. You can do this by using several trading strategies at once, as well as hedging risks by filling your investment portfolio not only with a variety of cryptocurrencies – Ethereum, Ripple, Litecoin, etc., but also with conventional currencies like the dollar, euro or yen, as well as with precious metals – gold or silver.
Moreover, we recall that depending on the situation, you can open deals both for their purchase and for sale. And even to buy and sell at the same time in order to then close unprofitable positions and leave profitable ones.
So, let’s repeat:
leverage is just a tool, and how to use it depends solely on the trader himself, his skill and … financial appetites (in other words, greed).
A little higher, we started talking about trading strategies and the professional skill of a trader. And here it is just necessary to say that for trading many brokers, such as FXOpen, offer to use the world’s most popular MT4 platform (MetaTrader 4).
Why did it become so popular? Because, with its simplicity and convenience, this platform provides the trader with excellent opportunities for technical analysis in the form of a huge number of indicators and charting tools. It also allows you to copy trades of more experienced traders and market professionals. In addition, a lot of trading algorithms have been written for MT4, on the basis of which thousands of robot advisors have been created, which allow trading in a fully automatic mode, without wasting time, effort and nerves for hours of vigil at computer monitors.
Perhaps all of the above sounds a little difficult for those who are used to just buying bitcoins and altcoins, counting on their growth. But, believe me, CFD contracts, 1: 1000 leverage, risk hedging, technical analysis and algorithmic trading will significantly expand your opportunities. And if you don’t believe me, you only have one thing to do – open a trading account with a broker and check it all yourself. Moreover, at FXOpen this procedure takes only a few minutes, and you can replenish your account and withdraw profits from it in different currencies.