Anyone interested in crypto-currencies has inevitably asked the following question: “how and where to buy them?”. The slightest Internet search offers numerous buy/sell platforms as results.
Beyond the security and reliability of the platform, which are essential criteria, there are a few subtleties to grasp in order to choose the platform best suited to one's needs. In particular, it is interesting to look at the difference between a broker (courtier) and a trading platform (exchange).
What Is a Broker?
A broker, or courtier in French, is simply an intermediary between clients and service providers. Brokers are present in many fields, such as insurance, real estate, and automotive.
Their main interest lies in their ability to offer negotiated prices to clients by leveraging volume effects with producers. Brokers also play the role of a facilitator when a transaction is complicated to execute, due to knowledge of networks, compliance of actors, and similar operational variables. This is, moreover, often the case in the world of crypto-currency.
When you buy bitcoins from a broker, the broker will procure the quantity of bitcoins you wish to acquire and sell it to you. Conversely, if you wish to sell bitcoins, the broker will buy them from you for its own account at a price fixed in advance.
And an Exchange (Trading Platform)?
A trading platform, on the other hand, is primarily a tool that connects buyers and sellers directly. The tool consists of two main elements:
- An order book: lists all buy offers (bid) as well as all sell offers (ask).
- A trading engine: matches a buy offer with a sell offer to generate a transaction, also known as a matching engine, which constitutes the core technological brick of the platform.
The price on the marketplace is thus determined by the price of the last transaction. The faster the trading platform allows a transaction to be concluded without a major price impact, the more "liquid" the platform is said to be.
eBay is an example of an exchange platform: there you find buyers looking for products and sellers selling those same products. The conclusion of a sale occurs following an auction where the proposed price meets the requested price.
What Are the Differences Between These Two Services?
First of all, there is a major difference in terms of pricing. Indeed, since the broker buys bitcoins for you and resells them to you, it will source them on a trading platform, pay the fees, and provide you with the requested quantity of bitcoins by applying the platform fees it paid as well as its own processing fees.
On average, crypto-currency brokers charge fees of around 1.5%, while trading platforms sit around 0.5%. Brokers are therefore up to 3 times more expensive than marketplaces. The difference might seem marginal on an asset like Bitcoin, whose daily volatility can erase this delta, but it can quickly become a factor to take into account.
But the difference does not lie solely in the rates. Indeed, the services offered by trading platforms differ from those offered by brokers, particularly around the mechanics of buy or sell orders. Since brokers play an intermediary role, their objective is to minimize interactions involving the client by simplifying the buying or selling mechanics as much as possible.
Whatever the asset concerned, the broker offers fixed buy and sell prices on which they apply a spread, which is a gap between the price offered to their client and their cost price. On the user side, even if the price structure is very opaque, it has the advantage of being fixed, so the broker's client knows the parameters of their transaction.
On the other hand, brokers do not provide direct access to the market and can at any time be de-registered from the trading platforms they source from, jeopardizing their supply and, in fact, their ability to offer their service to users.
The mechanics of buying and selling are more varied on a trading platform. These are what are called “orders”. Since the user is in direct contact with the market, they can fine-tune their purchase or sale.
Market Orders
They can decide to buy or sell at the market price. This is a market order. The user is said to consume an order from the order book; they are a “taker” because they take or remove the most advantageous sell offer and therefore consume liquidity.
Limit Orders
Alternatively, they can decide to place a limit order in the order book. This means they make an offer to buy or sell a certain quantity at a price they delimit. Once the order is placed, if it does not match an already existing order in the order book, the user must wait for it to be “consumed”, or matched with a counterparty that accepts the transaction according to its terms.
The user is then said to insert an order into the order book; they are a “maker” because they create a transaction opportunity and manufacture liquidity. These 2 types of orders are the most frequent, but depending on the platforms, there is a multitude of alternative order types. Note that some trading platforms, like Paymium, offer makers rewards for their transactions.
When orders involve large volumes, market order mechanics can cause a variation in the average transaction price, thereby creating a difference between the displayed price and the execution price. As a reminder, the market price corresponds to the price of the last transaction, but not necessarily to the price of the next transaction.
To avoid this price differential, trading platforms offer “over-the-counter (OTC) desks” to handle large transactions. There is also market protection on trading platforms to guarantee a minimum oscillation between the placement and execution of the order.
Technical Summary
In summary, it can be said that brokers charge much higher fees and do not provide direct access to the market, but offer an integrated solution that allows users to conclude a transaction as quickly as possible with a fixed price. On their side, trading platforms connect sellers and buyers directly and ensure the autonomy of users in their transactions. Furthermore, it is solely on trading platforms that the price is formed, which is then copied and adjusted upward by brokers.
In the past, when trading platforms only offered advanced interfaces, the broker's proposition made sense. One had to be an expert to master all these technical concepts. But today, platforms offer simplified interfaces and numerous services, such as asset custody, accessible to all, thereby reducing the necessity of going through an intermediary with higher rates.
Example Scenario
Suppose you wish to buy a fraction of bitcoin for an amount of €1,000. Here is how your funds would be distributed according to different platforms based on historical evaluations:
We notice that, despite the Bitcoin prices announced lower among brokers, the price retained during the execution of the order as well as the fees skyrocket, and ultimately, for the same amount invested initially, we end up with a difference of 0.002 BTC, which represented €75 at the time of calculation.
FAQ
What is the major difference between a broker and an exchange?
A broker (courtier) acts as a direct intermediary that sells to you or buys back from you crypto-currencies at a price fixed in advance. An exchange (trading platform) is a marketplace that connects you directly with other buyers and sellers via an order book.
Why are brokers generally more expensive?
The broker sources its supply directly from trading platforms. To generate revenue and cover its risks, it passes on the original fees and applies an additional margin (spread) on the final price. On average, their total fees are up to three times higher than those of an exchange.
What is the "spread" at a broker?
The spread represents the gap between the actual market price and the price displayed by the broker for its client. This cost structure, often integrated directly into the purchase price, makes overall pricing more opaque than the transparent commission fees of an exchange.
Are trading platforms suitable for beginners?
Yes. Once reserved for experts due to complex interfaces, modern platforms like Paymium now offer simplified modes. They allow you to buy Bitcoin in a few clicks while benefiting from the advantageous rates of the direct market.
What is a "Maker" order and a "Taker" order on an exchange?
A Taker buys or sells immediately at the current price by drawing from the available liquidity. A Maker sets their own price and places their order in the book, waiting for a counterparty to accept it. Makers create liquidity and often benefit from reduced fees or rewards.
