Cryptocurrency Decentralized/Centralized Exchanges vs Brokerages for Traders and Investors
Does The Crypto World Really Need Brokerages?
The current method of trading cryptocurrencies through the use of various exchanges — decentralized or centralized — is a perfect way for individual investors to satisfy their trading needs. However, the same cannot be said for those traders who tend to move larger amounts in digital currencies.
This method was also reported to cause slippage issues, as well as liquidity problems. Despite minimal entry barriers, regular crypto exchanges are simply not good enough for some traders. Problems like these do have a solution though, and traditional markets have solved them a long time ago by introducing brokerages.
Brokerages have the ability to address and resolve these problems so that the ecosystem can remain healthy and efficient.
Liquidity And Slippage Issues
Slippage is a relatively common occurrence caused by exhaustion of liquidity due to a large market order. Exchanges' execution engines are trying to fill out such orders whenever liquidity is available, which can lead to almost constant lack of it.
Let's say that a trader wishes to purchase a certain amount of tokens, but the price changes during the purchase. Depending on their position to buy or sell, the change can have different consequences. As a result, the said trader can experience either additional gains, or unexpected losses, all because the price changed at the wrong moment.
This is a pretty big issue in periods of large volatility, and it can significantly affect large orders. One temporary solution would be to create a limit order, instead of a market order. Even if traders were to employ this type of solution, this method can only cause a new problem that would damage the crypto environment. This new problem, of course, concerns liquidity.
Liquidity, as some may be aware of, is a concept that determines how certain coins can be purchased or sold without this token's general stability. Cash, for example, is one of the most liquid assets, since it can be gained and spent easily.
In the crypto world, however, liquidity is measured by different standards. The most important one is the coin's ability to be converted to either cash itself, or other coins. This is why so many exchanges are trying to add as many trading pairs as possible so that liquidity can be improved.
Additionally, this is why exchanges that offer only crypto-to-crypto trading pairs have much better liquidity than fiat exchanges. Fiat exchanges also struggle with much more complicated verification processes. An environment with low liquidity often causes high volatility, and crypto prices grow or drop as a result. In contrast, high liquidity allows the market to remain stable, and tokens generally enjoy better prices as a result.
How Can Brokerages Help With These Issues?
Thanks to the fact that crypto holders can easily and directly buy or sell desired tokens via crypto exchanges, many have been skeptical regarding the necessity of brokerages. After all, this is an invention of traditional markets, where processes behind purchases and sales are significantly more complex.
Many understand that full-service brokerages may be an attractive idea for some traders. They can often offer numerous additional services, not to mention interactions in person. However, what happens with those clients who need platforms for the purpose of execution only?
One solution is to make multiple small transactions on several exchanges over a certain period of time. Another solution might allow investors to enter trade via brokerages that offer exchanges as well as OTC platform as trading options.
In the end, many believe that brokerage platforms could be beneficial to the market, by providing multiple useful services. For example, one such service would be smart order routing. This method would use trading bots to find the best prices and make orders in several exchanges. That way, the platform user would receive the best execution, and exchanges would become a single pool of liquidity.
Another useful service provided by brokerages would include wholesale rates. While most platforms are rewarding users for frequent trading in some way, not every individual trader would have to work on creating such a relationship. Instead, brokerage service would do the work, and traders can simply take advantage of their effort, and experience better fees as a result. That way, brokerages could benefit even more from attracting new traders.
Finally, there is a block order execution. Basically, brokers would know who the largest traders are, and would be able to pair them for sale through the services' own networks. Clients would receive access to the best quote at any time, and liquidity and slippage issues would be completely eliminated.