As the cryptocurrency market expands, many new investors are confusing two types of engagement in digital coins: exchange and trade. In this guide, I will explain the difference between exchange and trade. I’ll also look at the pros and cons of each, and how should one approach them.
My aim is to provide a clear distinction between strategies you can use to get the most out of the industry. With large fluctuations, it is imperative to understand the environment. There are also factors such as platforms, tactics, fees, and other relevant details regarding the manipulation of coins.
Exchanging and trading cryptocurrencies
Many confuse these two terms, thinking they are one and the same. This confusion can lead many beginners into accidentally creating an order. Instead of getting cryptos deposited into their wallet, they will lose a lot of funds in the process. Trading is, by definition, a bit more complex activity to engage in. It is not a simple swap and there are marketplaces that offer both services.
Although both include cryptos and fiats, there are many factors that cannot be used in both. Some of which are certain functions, strategies, fees and even tools.
Here are some of the major differences that I will cover in detail:
- Tools and functions
Ownership of the cryptocurrency is without a doubt the most important distinction between exchange and trade, in my opinion. While swapping coins for fiats or other tokens/coins, the buyer receives their ownership. Thus, purchasing them ends with cryptos being transferred from one wallet to another, with the transaction being irreversible.
In trading, the investor doesn’t buy cryptocurrencies but rather “borrows” them from platforms for a limited amount of time. As with stock trading, coins engaged in this way are first borrowed and then sold back for a different price. Thus, as soon as you “buy” a coin, you will try to sell it to capitalize on price fluctuations.
The process for exchanging coins is quite simple. Potential buyer finds a seller, provides the payment method and the amount expressed in fiat/coin. He then acquires it once purchase has been conducted. Trading, however, is a bit more complex. The investor would initiate a trade by creating a market order under a specified price. The order would go live and would end once it satisfied pre-set criteria (when the value reaches the set limitation).
Tools and functions
Tools and functions available differ according to the activity. Exchanging coins would require only your intuition and charts to understand the general direction of the market. Trading, however, offers a wider range of tools and instruments alike. You have apps, API, charts, bots, and software packages for analysis. When trading, different functions are available, such as stop loss, leverage, fill or kill, market, scaled, and many other tools.
Strategies are also different when it comes to exchange and trade of coins. The most often used tactic when it comes to exchange is HODL. Buyers get the crypto and hold it for a long period of time. They are hoping to sell it when the price is several times larger than at the time when it was purchased. Traders have a few more, including scalping, day, trend, range, mirror trading and many others.
Advantages: What Do They Offer?
When buying digital money, investors gain a chance of selling them off at a hefty price, much like with assets. The process is quite easy and straightforward, often ending in a matter of minutes if credit cards are involved. I can assure you that a variety of deposit methods exist, as seen in the BitPanda’s homepage below.
As for trading, there are two main advantages so to speak. Traders do not hold the coin, meaning that the purchase process and safekeeping are short. Investors should not fear hackers due to the lack of wallets. And profits can be expressed either in cryptocurrency or in fiat, depending on traders’ choice.
Another advantage of trade is its functions. Leverage is one of the most popular options while trading. It allows investors to borrow a large volume of coins in a short time to make up for the lack of trading power. Stop functions help limit losses when the market does not behave according to the analysis’ findings.
What About Disadvantages?
This is where both types of transactions, exchange, and trade have similarities. Cryptocurrency market fluctuates at a much larger scale than stable marketplaces. Trading in such an environment can bring about heavy losses, especially if leverage function is used.
There have been hacking incidents, some of them large enough to shut down big businesses (Mt. Gox for example).
Other disadvantages include:
- Relatively small market compared to mainstream industries
- An excessive number of frauds
- The possibility of price manipulations
- New cryptocurrencies are often short-lived
Largest Representatives of Exchange and Trade of Cryptos
Here, I’ll list platforms, where exchanging and trading online currencies, is possible. In case you wish to digitalize your money, there are a few that are popular and safe to use:
CEX.IO: Available all around the globe, CEX.IO offers bank transfers and credit cards as a purchase method when getting coins. Fees range from free (bank deposits) to 5% (credit cards) while accepted cryptos are bitcoin, Ethereum, Litecoin, and five more.
Coinbase: Available in 32 countries only, Coinbase offers a safe environment where you can deposit money through bank transfers and cards. Fees are somewhat lower than CEX.IO, going up to 3.99%. Accepted coins are bitcoin, Bitcoin Cash, Ethereum, and Litecoin.
Kraken: This European exchange offers exchange services for anyone with a bank account. Credit cards are not available at this point. As with Coinbase and CEX.IO, verification with your scan ID is necessary for larger sums of money. However, unverified accounts are permitted to buy and sell with sums up to $2.000 per month.
As for trading, you have:
Bitfinex: A Hong Kong-based business that allows leverage of up to 3x. There are many other functions as well, including market, limit, stop limit, and several others, helping you limit your losses. Fees are organized according to maker/taker fees (0% – 0.20%), depending on the type of order you wish to open. Verification is necessary, however, if fiats are included in the trade. There are over 50 coins available at this point while the accepted deposit is bank transfer only.
BitMEX: This platform is crypto-to-crypto based only, meaning that you cannot fund your account with fiats. Fees range from 0% to 0.25% (maker/taker) and verification is not necessary. Leverage and stop functions are at your disposal, while the website can be used by anyone in the world.
eToro: This marketplace offers a unique space where social trading occurs. Leaders publish their orders and analyses, also earning from profits made by their followers. The trade here is possible through several deposit methods, including credit cards, PayPal, bank deposits, Union pay, Skrill, and Neteller. Instead of fees, there are spreads between buying and selling price of the coin. They range from 1.5% to 5%, depending on the cryptocurrency.
There are many more platforms that offer similar services and you can find them online easily. In recent years, more and more platforms have opened their operations. And some of them are dealing in both exchange and trade of cryptocurrencies.