Cryptocurrency exchange and trading platforms

This bull cycle in digital assets is generating a lot of interest among new retail investors. If you are one of them, it is important to consider the difference between buying digital coins through a cryptocurrency exchange and buying them through a trading platform.

Cryptocurrency exchange platforms are those that allow the investor not only to exchange a fiat currency for a cryptocurrency (for example, exchanging US dollar for Ether) but also to transfer these digital assets to a different account or wallet.

These types of cryptocurrency exchange platforms contribute to market makers and provide liquidity to both the buyer and the seller in the financial market. Let’s say you plan to sell a bitcoin coin at a value of $60,000 but can’t find a buyer willing to pay that amount. As you are executing this transaction on a cryptocurrency exchange platform, it takes your order and buys your coin at the value you are requesting. These market makers make a profit by charging a spread between the buy and sell price (spread buy/sell price). The cryptocurrency buying and selling platforms Coinbase, Kraken and Gemini are the most popular and considered to be among the largest in the United States, while Binance, Huobi and kuCoin are the largest in the world. If you would like to see the full list, please click here.

Cryptocurrency exchange platforms in the United States fall under the regulatory scope of The Bank Security Act. As a result, these platforms must have anti-money laundering or capital laundering compliance programs in place. This makes the process of buying/selling or investing with virtual currencies a bit challenging as those wishing to use these cryptocurrency exchange platforms must fill out forms with their personal information.

Advantages of using an exchange account:

  • Users can buy cryptocurrencies with fiat currency.
  • Users can exchange cryptocurrencies.
  • Users can send or transfer their private keys to other cryptocurrency exchange platforms or wallets.
  • Users can “staking” their cryptocurrencies (the act of storing coins so that with these the user could earn voting rights or receive rewards from the blockchain) and thus earn passive income.
  • Some of these platforms have rewards programs for their users.

Disadvantages of using an exchange account:

  • The process to set up/create the account can be tedious.
  • They require a lot of information from the user.
  • Charge fees for transferring cryptocurrencies, withdrawing cash, or buying/selling cryptocurrencies.

On the other hand, trading platforms are brokers that allow users to trade financial assets and cryptocurrencies in a simpler way. The catch is that these platforms do not cede control of private keys to their users. As the crypto community mantra goes: “not your keys not your coins”.

For example, users of the Robinhood trading app, once they have purchased a bitcoin coin, cannot store their coin in a digital wallet or earn passive income through staking. This platform, as well as PayPal are well known and a favorite of young investors due to their user-friendly interface. These firms are regulated by the Securities and Exchange Commission (SEC) and 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 cannot withdraw their digital coins or transfer them to a wallet. These platforms could be good for anyone who doesn’t want to go through the process of setting up a cryptocurrency exchange platform account.

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

  • Offers users exposure to digital currencies.
  • Simple interface.
  • 0% fee for buying and selling cryptocurrencies (Robinhood case).
  • Users can place limited orders.
  • Users can conduct both cryptocurrency trading and stock trading on the same platform (Robinhood case).

Disadvantages of using such a trading platform:

  • Users cannot lend their cryptocurrencies and earn a passive return.
  • Users cannot transfer cryptocurrencies to a different cryptocurrency exchange platform or e-wallet.
  • They offer a limited number of cryptocurrencies.

As you can see, there are different platforms that provide exposure to digital currencies. And it is important to recognize the advantages and disadvantages of each of them to make the decision when investing in these digital assets. It is worth remembering that these trading platforms are looking to implement the sending and receiving of cryptocurrencies for their users.

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