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Bitcoin Forex Brokers compared to Bitcoin Exchanges

Jul 25 2017
By
Jonathan Smith

Forex brokers have started accepting Bitcoin, both as a payment method and a trading instrument. While the former is a good sign for cryptocurrency enthusiasts, the latter may create an issue. It essentially makes forex brokers compete directly with the established crypto-exchanges. We will compare trading Bitcoin with a forex broker to doing so with a crypto-exchange.

 

The basics

 

The key distinction between forex brokers and crypto-exchanges is that with brokers you are actually trading a CFD, most of the time. For those of you who may not be aware, CFD stands for Contract For Difference and is exactly what it sounds like. It is a newly created instrument, which mimics the price movements of an underlying asset. There are such derivatives on many asset classes, including stocks, gold, oil, equity indices and even pork belly futures. It was just a question of time before CFDs on cryptocurrencies started appearing.

 

On the other hand, when trading at a cryptocurrency exchange, you are actually trading the coins. This means, once you buy some Bitcoin, you can actually transfer it to an address. This can be your own wallet, or that of a vendor, from whom you wish to purchase something. 

 

In essence, a CFD allows you to profit from the price movements of a cryptocurrency, while trading on an exchange (without margin) grants you ownership of the coins.

 

 

Security of funds

 

Reputable forex brokers are highly regulated. The stringency of regulatory agencies around the world varies drastically. In our forex brokers reviews we often warn about the risks when dealing with off-shore brokers, as they are not very tightly supervised. On the other hand you have watchdogs as the UK’s Financial Conduct Authority (FCA), which impose strict rules upon companies, under their oversight. From a trader’s point of view there are two major FCA principles which matter – the segregation of client funds and the compensation scheme. 

 

Segregation of client accounts means your broker can not freely access your trading capital, once you have made a deposit with them. There are certain rules regarding transfers, which vastly limit the potential for fraud. The Financial Services Compensation Scheme (FSCS) is a mechanism, which guarantees client funds against broker bankruptcy. If you trade with an FCA-regulated broker, which happens to go under, your account will be covered by the scheme, up to £50,000.

 

 

When it comes to cryptocurrency exchanges, the security of your funds is not as high. Some pretty big hacks have occurred at otherwise reputable exchanges, like the one which hit Bitfinex in 2016. Although they managed to handle the situation rather well, this can’t be said for all past (and possibly future) cases. Most experts recommend storing your cryptocurrencies on a wallet (preferably a cold-storage one), instead of leaving them at the exchange, if you plan on holding for the long term. 

 

 

 

 

Cost of trading 

 

Lots of forex traders only compare brokers by the spread which they offer. Although there are other factors, which are more important in our opinion, they are still not worth underestimating. Comparing the costs of trading at forex brokers and cryptocurrency exchanges is a bit like comparing apples to oranges. Wile most brokers include all the costs in the spread, exchanges usually provide tighter spreads but apply a commission based on the volume of your transaction. 

 

 

While our calculations may not be precise, we will try to compare the Bitcoin spread provided by IG, with the 0.25% fee, which some exchanges, like Bittrex charge.  For the purposes of our example, wwe will assume Bitcoin is trading at $7,000 (which it is currently hovering around).

 

If you were to buy a whole Bitcoin, at an exchange, your fee will be $17.50 ($7,000 x 0.25%). This commission is on a per-side basis, meaning you will have to pay another one, when closing the position.

 

When buying a Bitcoin CFD at IG, one would have to pay an average spread of 10.61 points. This will be the equivalent of $10.61, if you are trading with one Bitcoin. Do keep in mind this is a round-turn commission, meaning you only pay the spread once.

As you can clearly see the calculations depend on a lot of factors and are bound to change if the price of Bitcoin moves significantly.

 

 

The ability to go short

 

One of the main advantages of CFD trading, with a forex broker is the ability to go short. For those of you who aren’t familiar with trading, this is the ability to profit when the price of a given asset goes down. A few crypto-exchanges offer this possibility, but this comes at costs for the borrowing of the actual coins. 

 

Long term investing

 

In case you are а firm believer in the power of blockchain technology, you may be thinking about buying cryptocurrencies and holding them for years to come. In that case you would be much better off with a cryptocurrency exchange, than with a forex broker. The reason for that is quite simple -  exchanges do not charge overnight fees, whereas CFD brokers do. While some forex traders may be thinking this is similar to the way currency swaps are implemented, the situation with cryptop-based derivatives is much higher. 

 

While exchanges do not charge an overnight fee, they are more vulnerable to hack attacks, as we mentioned above. Industry experts recommend keeping the coins, which you do not plan to trade shortly on your own wallet, instead of the one provided by the exchange. Being in control of your private keys is the most important feature, so be sure to check if your wallet provider offers this service. For the ultimate level of security, you could look into hardware wallets like the Trezor or Ledger Nano. 

 

 

Leverage ratios and costs

 

A forex broker can provide a much higher leverage ratio than a traditional exchange. For instance the FCA-regulated industry veterans at HYCM currently offer 1:10 for Bitcoin trading. Brokerages are much more used to dealing with the risks involved with clients over-leveraging, than crypto-exchanges are. They have risk management mechanisms developed for other trading assets, which a simple tune-up makes work with new trading instruments. That being said, you should not expect anything near the highest levels, provided for the major pairs (like EUR/USD)

 

Exchanges, on the other hand, usually provide a leverage ratio around 1:2 or 1:3. Furthermore, you have to actually borrow the coins you wish to trade from other participants on the exchange, who are willing to provide them. This comes with relatively small fees, which are charged on a daily basis, but can add-up in the long run.

 

 

Payment methods

 

Forex brokers usually accept payments via the traditional methods, such as bank transfer credit/debit card and occasionally on-line solutions, such as Skrill or Neteller.  This makes the easer to access for most people, when compared to most cypto currency exchanges.

 

In order to get some funds to the exchange, one would have to already go through a cryptocurrency transfer, via a service which accepts his money. Although this may sound like nothing to a Bitcoin aficionado, it can be a major gateway for somebody who is new to this. That being said, educating yourself about this technology can’t hurt, especially, if you want to trade cryptocurrencies.

 

 

Variety of coins

 

Many exchanges offer a plethora of alternative coins or “altcoins” for short. Although Bitcoin is the most widely known (and used), there are literally thousands of coins available. Most of them do not want to become the a “Bitcoin killer”, but are rather focused on specific niches of the on-line economy. We would recommend doing substantial research on each coin, before actually investing in it. This goes even more so for companies offering ICOs or Initial Coin Offerings. Though this sounds similarly to an IPO, there are major differences between the two processes and most importantly a lack of a regulation on who can start such a project. Due diligence may be even the most important element of the cryptoverse. 

 

On the other hand forex brokers, who provide trading cryptocurrency at all, usually focus on Bitcoin. That being said, Ethereum, Litecoin and a few other popular coins are also starting to appear at certain brokerages. 

 

The bottom line

 

There are multiple ways to trade Bitcoin and other cryptocurrencies. We compared the major benefits and weaknesses of trading them on an exchange and with a forex broker. To summarize everything – if you are looking for short term, speculative trading – forex brokers may be a better alternative. On the other hand, if you are looking to invest for the long run, exchanges are the way to actually own a cryptocurrency. Here is a list of the specifics:

 

  Forex Broker Crypto currency exchange
Asset class CFD Crypto currency
Security High (with good brokers) Often dubious
Costs of trading Added in the spread Commissions based on size
Ability to short Yes Usually no
Suitable for long term investing No Yes
Leverage ratio Usually higher (1 to 10) Usually lower (1 to 2-3) 
Costs of leveraging Usually zero Dependent on offers by other traders
Payment methods Traditional – bank transfer, credit/debit card, on-line solutions like Neteller or Skrill Cryptocurrencies (most often Bitcoin) and ocassionally traditional methods
Variety of coins Most often Bitcoin, occasionally Ethereum, Litecoin and other majors Dependent on the exchange, but usually far more.

  

TAGS: bitcoin  forex  broker  exchange  trading   
Broker Country Regulation Platform Min Deposit Review
Cyprus, UK, Mauritius CySec, FCA, FSC MT4, MT5, Web $10 Review Website
UK, Bulgaria FCA, FSC Web €29 Review Website
Australia ASIC MT4, MT5,
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Cyprus, Australia CySec, ASIC MT4, MT5 $5 Review Website
UK, Australia, South Africa FCA, ASIC, FSCA MT4, Trading
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UK, Cyprus, UAE, South Africa FCA, CySEC, DFSA, FSB MT4, MT5, FxPro
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Belize IFSC MT4, MT5 $100 Review Website
Cyprus, UK, South Africa, UAE CySec, FCA, FSCA, DFSA MT4, MT5, Web $5 Review Website
Cyprus, UK CySEC, FCA MT4, MT5 $1 Review Website
UK FCA MT4, Web, MT4
for Mac
$100 Review Website
Australia, UK ASIC, FCA MT4, MT5,
cTrader
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