Crypto Trading on an Exchange vs Investment Brokerage: Which is Better?

Crypto Trading on an Exchange vs Investment Brokerage: Which is Better?

Everyone seems to want a slice of the cryptocurrency pizza these days — including, ironically, the big banking institutions that Bitcoin originally intended to undermine.

In May 2021 alone, both DBS and Saxo Bank rolled out crypto products. Unfortunately, DBS’s crypto exchange is for ~private banking~ clients only. If you’re not in this exclusive club, Saxo’s new crypto FX trading platform would be more relevant.

Of course, both banks late to the game as dozens of crypto exchanges already exist for buying and selling coin online.

So which should you choose? Let’s take a closer look at the differences between trading on a crypto exchange and crypto trading on an investment brokerage like Saxo.

Method 1: Trading on crypto exchange

Before all these financial institutions popped up, the “traditional” way to buy and sell crypto was on crypto exchanges.

To get started, you typically need to set up an Xfers digital wallet and link it to your crypto exchange account. It’s a bit troublesome to set up, but allows you to buy crypto directly using SGD from then on.

Then you can go ahead and purchase the crypto of your choice. Minimum trading amounts are so low that they’re practically nonexistent. For example, here are the minimum trade sizes for Gemini:

Cryptocurrency Minimum Trade Size Approximate Equivalent in Singapore Dollars (CAA 28 May 2021)
Bitcoin (BTC) 0.00001 $0.50
Ethereum (ETH) 0.001 $3.60
Litecoin (LTC) 0.01 $2.50

On an exchange, everyone owns their crypto directly, and can buy/sell cryptocurrencies from other individual traders. Every time you buy and sell, the exchange takes a fee — for example, 0.35% on Gemini or 0.6% on Binance.sg.

On the downside, crypto exchanges are vulnerable to cyberattacks. If you’re holding on to large amounts of crypto, it’s recommended that you take your assets offline to keep them safe.

To sum it up, buying and selling crypto on an exchange:

  • Low barrier to entry, low cost
  • Direct ownership of crypto
  • Not secure for large amounts of crypto

Method 2: Trading crypto ETPs or ETNs

Some investment brokerages offer something called cryptocurrency ETPs/ETNs, which you can trade directly on the platform, just like stocks and ETFs.

The main advantage here is a combo of convenience + security. You don’t need to set up Xfers, worry about the exchange getting hacked, sudden Bitcoin shortages, moving your excess crypto offline, and all that.

Sponsored
Saxo logo
Online Promo
Min. Commission Fee US Stocks
US$4
Min. Commission Fee SG Stocks
S$5
Min. Funding
S$3,000
Online Promo:
Enjoy S$0 commission fees when trading ETFs on Saxo Markets. Valid till 31 Dec 2021. T&Cs and certain market exclusions apply
Valid until 31 Dec 2021

You’ll be paying a premium for that peace of mind, though. We picked out the commission fees (Classic account tier) for 3 of Saxo’s crypto ETPs below:

Crypto ETP/ETN Saxo commission fees Min. commission
Bitcoin Tracker One XBT Provider – ETN 0.1% SEK 65 (~S$10.39)
Ethereum Tracker One XBT Provider – ETN 0.1% SEK 65 (~S$10.39)
21 Shares Ripple XRP ETP 0.1% CHF 18 (~S$26.54)

With high commission fees like that, you’ll need to invest at least $10,000 to make the commission fees worth your while.

But the biggest potential concern here is that ETPs and ETNs are complex derivatives of crypto. They are financial instruments built to track cryptocurrencies’ price movements — but in a very convoluted way. Many retail investors would struggle to understand crypto ETPs, let alone feel comfortable investing large sums.

To sum it up for crypto ETPs/ETNs:

  • High barrier to entry
  • Crypto derivative with no direct ownership, more liquid
  • Highly complex
  • Minimise security risks associated with exchanges

Method 3: Crypto FX/forex trading

And finally, there’s crypto FX trading, which can be done on a forex trading platform or an investment brokerage, like Saxo, that supports crypto FX.

You watch the exchange rate fluctuate between your currency pair, let’s say BTC/USD, and jump in whenever you have a chance to buy low and sell high. For every trade, you’ll need to pay a “spread”, which is the difference between bid and ask prices. Read this article for more on how forex trading works.

While you don’t need a five-digit sum to get started with crypto FX trading, it’s still significantly more than the minimum trade size on a crypto exchange. Here are the minimum amounts on Saxo:

Cryptocurrency Minimum Trade Size Approximate Equivalent in Singapore Dollars (CAA 28 May 2021)
Bitcoin (BTC) 0.01 $500
Ethereum (ETH) 0.1 $400
Litecoin (LTC) 1 $260

Notice that you need not be a “true believer” in crypto to play this game. All you need is volatility in the short term, which is pretty much a given. In fact, you can even short Bitcoin if you think its value will drop.

Most platforms also offer “leveraged” or “margin trading” for their crypto FX offerings, which means you trade with borrowed money, amplifying both your losses and gains. That’s frankly absurd given how volatile crypto already is, without leverage.

In summary, crypto forex trading is:

  • A complex, high risk game
  • Medium barrier to entry
  • No direct ownership of crypto
  • Minimise security risks associated with exchanges (but has risks of its own!)

Which form of crypto trading should you choose?

Depending on your own views on cryptocurrency and what you’re hoping to gain from this venture, there’s going to be a different answer for you. It all boils down to two big questions.

1. How much do you want to put into crypto?

The barrier to entry differs significantly across all 3 products. You can start with just $0.50 worth of BTC with a crypto exchange, versus $500 for FX trading or $10,000 for a Bitcoin ETN (both on Saxo).

We’re guessing that Saxo, being an “establishment” player, is offering crypto products for investors with deep pockets — folks with plenty of money invested already, who are looking to diversify their portfolios.

For them, $10,000 may be only a small fraction of their total net worth. For us, it could be a really huge chunk of our financial safety nets.

So it makes a lot more sense for beginner investors to choose the method with the lowest possible barrier to entry. That way, you can trade small amounts of crypto on an exchange — amounts you can afford to lose!

2. Do you want to own cryptocurrency directly?

So you’ve drunk the Bitcoin Kool-Aid and have an unshakeable belief that crypto is the future of civilisation. As a purist, you’ll probably want to own crypto directly — and the only way to go is a crypto exchange.

On the other hand, maybe you trust financial institutions more than crypto exchanges, which seem to you like an unsafe place to stash your hard-earned money.

Ideally, you’d want to trade cryptocurrency with a trusted institution like DBS. But, until then, you might actually want to avoid owning crypto directly — perhaps opting for a derivative like a crypto ETP instead.

Sponsored
Saxo logo
Online Promo
Min. Commission Fee US Stocks
US$4
Min. Commission Fee SG Stocks
S$5
Min. Funding
S$3,000
Online Promo:
Enjoy S$0 commission fees when trading ETFs on Saxo Markets. Valid till 31 Dec 2021. T&Cs and certain market exclusions apply
Valid until 31 Dec 2021

The future of crypto trading in Singapore

Though we’re critical of crypto derivatives and forex trading, we can see that these products were intended to plug a market gap that crypto exchanges have left unfilled.

People increasingly want to invest large amounts of money in crypto, without the risk of losing it all in a cyberattack. They also want more liquidity — to trade large amounts more fluidly as opposed to constantly having to transfer from hot to cold wallet.

Both are real problems with the current crypto exchange ecosystems. But so far, neither ETPs nor FX are the perfect solution — they each have their own risks and tradeoffs.

As the cryptocurrency market experiences rapid growth, we’re probably going to see more products like these, marketed as more secure and more convenient ways to trade crypto. The truth is that things are seldom all that simple.

Rather than believing the spin, we hope you take the time to research, think carefully about your options, and know what you’re comfortable with before you invest.

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