Do You Need a Broker to Trade Cryptocurrencies?
The decentralized, anonymous nature of cryptocurrency means that you don’t technically need a broker to trade the currency. You can trade crypto with anybody—no fees, no centralized exchange, and no mediator. So, the question becomes whether you should work with a cryptocurrency broker.
A crypto broker serves as a middleman between the person buying and the person selling the cryptocurrency. The broker might also buy up a lot of cryptocurrency to sell on its own platform, making more of a direct seller. However, more often than not, the term “cryptocurrency broker” is used to refer to an intermediary. You place your order through the broker. After you pay for the cryptocurrency, the broker places your order on the crypto exchange.
Advantages of a Cryptocurrency Broker
There are several advantages of a cryptocurrency broker. First and foremost, the main advantage is the easy setup. Solo crypto trading is often associated with technical issues relating to the blockchain. Because a broker already has an established system, the technical issues are more avoidable. Also, a cryptocurrency broker lets you conduct leveraging, which is a type of trading that allows you to borrow funds to increase your position.
A cryptocurrency broker has more advanced technical instruments (such as a downloadable platform, mobile app, website, etc.) than someone who is doing it on their own. Crypto trading is faster, and you may also find that, when you use an established system, the price of the crypto is fairer.
Disadvantages of a Cryptocurrency Broker
Crypto brokers have their disadvantages. The main downsides to a crypto broker are fees and commissions. When you’re trading on your own, you don’t have to pay commission to anyone. A broker will likely charge commission, so you have to weigh the advantages listed above against the costs of such fees. Additionally, a crypto broker that is not reputable or regulated could cause you to lose money.
Is Cryptocurrency Trading Risky?
The short answer is yes. Cryptocurrency trading is risky because the currencies themselves are usually very volatile. It’s not uncommon for the value to plummet hundreds of dollars at the drop of a hat. It’s also not uncommon for it to suddenly skyrocket in value.
Also, another major risk is crypto cybercrime. There is little to no regulation of this trading field, and cryptocurrency is not backed by the government. It doesn’t go through a bank, nor will the SEC reimburse you if you lose all your money. Crypto-related cybercrime ranges from mishandling private information to hackers raiding and depleting users’ cryptocurrency accounts.
How Can I Tell if a Crypto Broker is Regulated?
The EU and the US, under the Biden administration have started to regulate cryptocurrency brokers. This should speed up in the aftermath of the SVB disaster. Additionally, countries like the UK are pushing forward with regulating cryptocurrency brokers.
While most countries do inforce regulations, it is still important to remain vigilant of the warning signs of an unscrupulous or untrustworthy broker. Spotting these warning signs is key to avoiding being a victim. Such signs include non-existent services and products, unrealistic promises, questionable marketing practices, and anonymous identities of brokers.
Non-Existent Services: If the broker lists certain services in its marketing, it should have those services. For example, if a broker says that it offers research and data, there should be research and data available on its platform. Simply put, the products and services listed should be there for you. If the broker is being dishonest about these services, move on.
Unrealistic Promises: If a crypto broker promises you that you are going to get rich, they are not trustworthy. A good broker knows that all trading, whether crypto or non-crypto, is volatile, and you shouldn’t make promises that might not come true. The broker should only promise to be ethical and provide a solid platform. Making unrealistic predictions is a sign that the broker is unscrupulous.
Questionable Marketing: This is especially common on social media. If a broker makes fake accounts on social media, with each account claiming to be a satisfied customer, that broker is a scammer. Don’t just avoid doing business with the broker, block them too.
Anonymous Identities of the Brokers: You should know the identity of the broker with whom you’re getting in business. While the nature of cryptocurrency allows for anonymous transactions, starting a crypto platform is, essentially, starting a business. A broker must be transparent about its identity, just as any business would. If the broker won’t even share their name, there is likely a good reason, and you should definitely avoid them.
How Do Cryptocurrency Brokers Make Money?
Cryptocurrency brokers make money by charging fees and commissions on the transactions they conduct. Cryptocurrency is new enough that many brokers are able to charge higher fees than they would for other, non-crypto products.
Additionally, they also make money from trading derivatives. Traders using brokers to buy and sell cryptocurrency derivatives contracts do not own the actual cryptocurrency. Since traders don’t own the crypto coins, Brokers get to speculate with the asset while making money from the derivatives contracts simultaneously.
All in all, cryptocurrency is volatile, but it can be lucrative. When you’re looking for the best cryptocurrency broker, make sure you pick a broker who is transparent, honest, and has nothing to hide. Reading reviews will help you with your selection.