Cryptocurrency Exchanges vs. Trading Platforms – Digital Currency Exchange

Cryptocurrency Exchanges vs. Trading Platforms

Cryptocurrency Exchanges vs. Trading Platforms

The last twelve months have been very exciting for the digital currency market. After being in a bear market for almost three years, digital currencies started to gain momentum between March and April of 2020. Both Bitcoin and Altcoins attracted high demand as public companies started to adopt Bitcoin as part of their balance sheet.

In March 2020, Bitcoin made a double bottom reaching the $3800 level. From that
month, the successor to Gold made a nice rally reaching almost $65,000 in April
2021.

Here is a monthly chart of Bitcoin (BTC).

Source: Tradingview

At the same time, altcoins, which are all other digital currencies excluding Bitcoin, have seen an increase of more than 2,400% since then. The following chart shows the total market capitalization for altcoins.

Here is a monthly chart of the altcoin’s market capitalization (TOTAL2).

Source: Tradingview

This new bullish cycle in digital currencies is generating interest from many new retail investors. Therefore, if you are one of them is very important that you understand what the difference is between buying digital currencies through a regular exchange and a trading platform.

Cryptocurrency exchanges are platforms that not only allow users to convert their fiat currency for digital currencies but also to transfer their digital currencies to a different exchange account or wallet. For instance, if you are a US resident, you would be able to convert your US dollars for Ethereum. These cryptocurrency exchanges can also be market makers that provide liquidity. For instance, let’s say you are willing to sell 1 Bitcoin at $60,000, but you don’t find anyone willing to buy one Bitcoin for that price, the cryptocurrency exchange, where you are planning to execute this transaction, takes your order and buys that Bitcoin for $60,000. Market makers make profits by charging a spread on the buy and sell price. Coinbase, Kraken, and Gemini are the largest cryptocurrency exchanges in the United States, while Binance , Huobi, or kuCoin are the largest cryptocurrency exchanges around the world. Cryptocurrency exchanges in the United States fall under the regulatory scope of the Bank Security Act (BSA). As a result, these cryptocurrency exchanges must have anti-money laundering compliance programs in place. This makes the process a bit of challenging because everyone who wants to use one of these cryptocurrency exchanges will need to upload a picture of a valid ID and respond many questions.

Advantages of using an exchange account:

  • Users can buy cryptocurrencies with fiat currency
  • Users can swap coins
  • Users can send their coins to a different platform (exchange account, software wallet, or a hardware wallet)
  • Users can stake their coins an earn a passive income
  • Some of these exchanges have reward programs for their users 

Disadvantages of using an exchange account:

  • The process to set up the account can be tedious
  • They require lots of information from the user
  • Charges fees for transferring coins, cashing out, and buying/selling coins

On the other hand, cryptocurrency trading platforms are brokers that enable users to trade digital currencies without giving control of the private keys to their users. As the saying goes “not your keys not your coins.” For example, someone who uses a Robinhood account to buy Bitcoin won’t be able to store his/her coin in a wallet or earn passive income by staking his/her coin. Platforms such as Robinhood or eToro are very well-known and are mainly used by Millennials because of their easy-to-use interface. These firms are regulated by the Securities and Exchange Commission (SEC) and they both are members of the Financial Industry Regulatory Authority. One of the main drawbacks of investing in digital currencies through these types of platforms is that users can’t withdraw their digital currencies or transfer them to a wallet. These platforms could be good for anyone who does not want to go through the process of setting up an exchange account.

Advantages of using a trading platform such as Robinhood or eToro:

  • Gives users exposure to digital currencies without ownership/control
  • Simple interface
  • 0% fee for buying and selling cryptos
  • Users can place limit orders
  • Users can have both crypto trading and stock trading on one platform

Disadvantages of using trading platform such as Robinhood or eToro:

  • Users can’t stake their coins and earn a yield
  • Users can’t transfer cryptos to a different exchange/wallet
  • Only a few cryptos can be purchased

As you can see, different platforms can be used to have exposure to digital currencies. It is important to recognize the advantages and disadvantages of each of them and analyze what would be the best approach for you. Please feel free to leave a comment or question.