A cryptocurrency broker is an authorized company that has the necessary means to mediate in this type of financial instruments. Their job is to execute the buy and sell orders that the client decides to carry out, in exchange for a commission.
At the same time, this type of cryptocurrency brokers usually offers brokerage services on other financial assets such as currencies (Forex market), stock indices, stocks, raw materials, energy, etc. Cryptocurrency brokers are usually Forex and CFD brokers who have decided to incorporate these assets into their offer of instruments available for trading.
CFDs are derivative financial instruments. In this case, the asset on which they are issued (called “underlying”) is a cryptocurrency. These are contracts in which the price differences that may exist on the underlying are exchanged at two different times (coinciding with the opening and closing of the operation).
In other words, when investing through a broker through CFDs , the asset is not obtained physically , the only thing that is done is an investment on its price fluctuations. This type of investment allows you to take advantage of your movements in the market without having the need to store cryptocurrencies.
So, when we talk about a cryptocurrency broker, we refer to a CFD broker on cryptocurrencies or other financial instruments that take them as a basis (underlying asset).
Other advantages of CFDs is the possibility of using financial leverage and being able to trade short. That is, selling a CFD (without having to have it in possession) with the aim of buying it back at a lower price and making a profit from price drops. It is so easy to trade CFDs short than when it comes to taking long positions (the classic buy to sell at a higher price).
The only thing that is needed to invest in cryptocurrencies in this way is a broker that contains these assets in its catalog of available instruments. Open an account with him and deposit a small capital. The process is quick, easy and completely online.
What is the difference between a cryptocurrency broker and an exchange?
As we have just seen, a broker is the intermediary to buy and sell in a financial market. Cryptocurrencies are not listed on an official market, but can be bought and sold for cash (that is, physically) through a platform that provides access to existing supply and demand. In this case we are talking about a cryptocurrency exchange.
Normally, exchanges usually offer all the parallel services so that the operation is complete, such as information about the market or a place to store assets (wallets or digital purses).
On the other hand, there are intermediaries that work other types of financial markets on cryptocurrencies, in addition to CFDs. For example, we can mention a cryptocurrency futures broker (there are financial futures on Bitcoin and Ethereum).
In this case, the cryptocurrency broker provides us with access to these types of markets, but it is not the spot cryptocurrency market.
One of the main differences is that cryptocurrency CFD brokers offer us two prices:
Bid: is the sale price. At this price the broker will buy the asset.
Ask: Rather, this is the purchase price. It is the price at which the broker will sell when it decides to buy the cryptocurrency.
Cryptocurrency brokers do not apply commissions for the sale of CFDs, the trader only assumes the difference between these two prices, which is called Spread.
On the other hand, the commissions of cryptocurrency exchanges are somewhat more complex, they are usually expressed as a percentage of the volume to buy or sell; but this percentage depends on the amount we have traded or if we launch the limit or market order.
Cryptocurrency brokers through CFDs have a simpler operation. In addition, the asset is not purchased physically, thus, its custody is not necessary and the risk of theft is eliminated.
How to choose a good cryptocurrency broker?
When deciding to hire the services of a cryptocurrency broker, the client must bear in mind the following questions.
The importance of regulation of a cryptocurrency broker
The cryptocurrency market is not an official market (except for financial futures on Bitcoin and Ethereum); It is a decentralized market, lacking regulations and without a clearing house. Hence the importance of opening an account with a duly regulated company.
Forex and CFD brokers on cryptocurrencies have experience in this area, since they are markets that share the same characteristics. Generally, most of this type of online brokers are usually duly authorized by the financial authorities of the country in which they are based.
The trader can check the regulation of the cryptocurrency broker by attending the public registry of the aforementioned supervisory body. It is advisable to verify that said body is rigorous and prestigious.
A regulated broker is a guarantee that you comply with financial regulations. You have no scope to commit any type of fraud and the regulatory body watches over its good practices. This type of institution has sanctioning capacity and its mission is to protect the interests of investors.
On the contrary, a broker that is not regulated, lacks the corresponding license to carry out its activity as a financial services intermediary. Therefore, it acts outside the law and increases the chances of scam. In addition, there is no guarantee of security for client funds.