If one was to pay attention to current cryptocurrency news, one might be confused by the number of banks and traditional investment firms getting into the game. With institutional cryptocurrency investing growing in popularity and with blockchain technology growing past its nascent phase, the news that JPMorgan Chase has issued its own cryptocurrency or online bank Swissquote is now offering crypto custodial services may not be surprising.
What may be surprising, however, is the advent of traditional banks offering cryptocurrency products, crossing the once well-defined line in the sand between crypto and the banking industry. Goldman Sachs’ purchase of the crypto exchange Poloniex, foreign banks Fisco and Skandiabanken developing new products like traditional bank accounts linked to crypto portfolios, and Fidor Bank offering traditional banking services for altcoins have many looking at how the banking industry may be protecting itself against a future where crypto is trusted more than banking.
While there are currently few consumer-grade traditional banking options available – beyond specialized products, like crypto exchange-traded funds – this will likely be a trend that’s more common in the future. So, it is worth asking what the difference between brokerage-managed trading and exchange trading of cryptocurrency is, and which is better.
Understanding Brokerage Service
Like a stockbroker, a crypto broker is an agent or firm that handles the trading and management of a client’s crypto assets. In the case of exchange-traded funds or other managed portfolio products, the broker may engage in trades without the explicit consent of the client. Other brokers will trade per explicit requests from clients and per limits and goals previously established.
Fee structure is a key benefit of working with brokers. Under a traditional exchange situation, one must pay both a network fee and a commission for every buy and sell order. If a trader was to trade a large amount of assets, this may be too much for a single order and may have to be split up. This may be complicated by trades to and from fiat, which not every exchange offers and usually incurs higher fees.
So, say a trader wishes to buy a large amount of bitcoin from fiat on an exchange. As most bitcoin trades are fractional bitcoin orders, a trader may have to engage several buy orders, incurring as much as a 15 percent total fee.
With a broker, the trader can pay him/her/it directly for a single fee. Usually, within the zero to three percent range, brokered trades avoid the multiple orders fee surcharge. For large orders, brokerage can be a cost-saving option.
The strongest argument for brokerage, however, is goal-setting. While exchanges do allow limit setting on assets in their possession, it is on the trader to act. Usually, the alert is a text message or email indicating that current prices have hit the demarcation you set. Some exchanges do allow limit-based buying and selling, but the trader still needs to monitor his/her account to ensure that the limits meet current goals.
A broker, conversely, is responsible for limit maintenance. As such, the broker would be able to weigh market conditions netter, as he/she/it is regularly monitoring the market. Spreads (the difference from the expected buy/sell price and the actual buy/sell price) on orders are typically tighter with brokers than exchanges.
Finally, regulated brokers are required to guarantee some level of custodial protection of managed assets. This means that the broker would be responsible for any lost or pilfered assets that were in his/her/its possession. This is different from an exchange, which may not be obligated to recoup such losses. This protection is, however, limited to if the broker is regulated by a reliable authority, like the SEC, FCA, or CySEC.
While the options for cryptocurrency brokerage are limited right now, brokerage may offer beginner or large investors another option than having to manage their cryptocurrency portfolios themselves. It is worth looking out for future brokerage options or forex cryptocurrency brokerage firms, if those interest you.
However, in exchange for convenience, brokerage takes away control. There are traders that want to be able to choose how their coins and tokens are stored, how they are traded, and if they should be held in cold storage. Additionally, a brokered portfolio is limited to the products the broker offers. An active trader must consider if the loss of control is worth the ease of use and if the crypto brokerage industry is mature enough to be fully trusted.
Finally, there is the “elephant” in the room. When Satoshi Nakamoto introduced bitcoin, he was creating an option from traditional banking. It is an open question worth debating if brokerage violates Nakamoto’s vision or if we should still be giving credence to Nakamoto’s ideals. It will be up to the individual to determine if brokerage is right for the crypto community and for themselves.
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