Crypto exchange vs. broker
At a broker you usually buy a security that tracks the price of a cryptocurrency. At a crypto exchange you buy the coins themselves. The big difference lies in how they're held and what rights you have.
Learning objective: After this lesson you can explain how a crypto exchange and a broker differ in custody and rights.
Through a traditional broker you almost always buy crypto as a security that tracks the price. You get no coins and need no wallet. In return everything sits in your usual brokerage account.
Buying on a Crypto Exchange
On a crypto exchange you buy the coins themselves. You can leave them there or send them to a wallet of your own. Only then do they really belong to you.
Risk of Leaving Coins on the Exchange
The catch with leaving them there: on the exchange you usually only have a claim against the company, not a protected holding. When FTX collapsed in 2022, that's exactly why customers could no longer get at their money.
Rule of Thumb for Amounts
As a rule of thumb: small amounts for trying things out can sit on a regulated exchange. Anything you'd hate to lose belongs in a wallet of your own, or you don't buy it at all.
Crypto securities are built very differently. With physically backed ones, the issuer deposits real coins with a custodian, and sometimes you can even have the coins delivered. Legally, though, it remains the issuer's debt security. If the issuer goes bust, you have a problem. The deposited coins only make the risk smaller.
Custody on Exchanges
Large crypto exchanges often keep their customers' coins in pooled accounts. Whether they're protected in a bankruptcy depends on the country and the contract. Some exchanges show how many coins they hold with a so called proof of reserves. But that says little as long as nobody checks at the same time how much they owe their customers.
MiCA Rules
In the EU, the MiCA regulation has set uniform rules for authorisation and custody at crypto service providers since the end of 2024. That's real progress compared with providers without any supervision. But it doesn't replace your own checks, because what happens to your coins in a bankruptcy is still governed by each country's law.
Summary
- At a broker you usually get a security, not coins.
- Coins on an exchange are often just a claim against the company.
- Anything you'd hate to lose doesn't belong on a trading platform.
Did you get it?
What do you own with a crypto backed security?
A debt security of the issuer with its default risk and no coins, even if coins are deposited.
Why does proof of reserves alone say little?
Because it only shows what's there, not how much the exchange owes its customers.
What's the practical rule of thumb?
Only leave small amounts on the platform and hold larger amounts yourself.
Check your understanding
Your task
You want to put $3,000 into crypto. Write down the amount up to which a total loss would not hurt you and whether you would leave that part on an exchange. Then write where you would keep the rest, or whether you would not buy it at all, and explain in two sentences.
Sources and further reading
- The EU Markets in Crypto-Assets Regulation (MiCA) creates uniform licensing and custody requirements for crypto service providers across the EU. View source ↗