Crypto Investing 101: What is A Brokerage?
We’ve been talking a lot about brokerages here at Amplify lately, but if you’re new to crypto, investing, or crypto-trading, you might be wondering, what exactly a brokerage is and what does it do? Although brokerages are common in the world of traditional securities investing, they’re still an emerging niche in crypto.
A brokerage is a service that helps clients buy and sell assets — so now you might be thinking, “well, what’s the difference between an exchange and a brokerage”?
Well, on an exchange, crypto trades are executed when buyers within the exchange find an offer from a seller within the exchange that is in-line with their acceptable bid price/quantity of tokens they are looking to purchase, and vice versa. However, a buyer trading crypto via an exchange only gets the price conditions of the sellers on that exchange, even though there might be other sellers on other exchanges offering even better terms. Unfortunately, the buyer will never know this unless they painstakingly search through each exchange before each trade.
Brokerages on the other hand, typically don’t host an orderbook or participate in market making. Instead, brokerages connect their users to the best offer for their desired trade on the market, examining both exchanges and private networks of buyers and sellers who don’t even use those exchanges. While an exchange will help you find the best trade hosted within their own database, a broker will help you find the best trade (bid/ask price) in the market. Plenty of brokers provide this service in traditional finance, and a growing number — including Amplify — are beginning to offer crypto brokerage services.
Brokerage Options
If you’ve started researching brokerages, you might have noticed that there are several different kinds of brokerage firm:
Full-service — Full-service brokers execute orders for their clients and provide advice regarding which assets to trade and when. They may also provide comprehensive wealth management advice and services such as estate planning. Of course, none of that comes cheap — full-service brokers mostly serve affluent investors who can afford their high fees and margin requirements.
Discount — Discount brokers execute orders at their clients’ discretion, but don’t provide much guidance or advice. Many online brokers are discount brokers. They are significantly more affordable than full-service brokers, but clients have to do their own research on the market and the assets they are interested in trading.
Over-the-Counter (OTC) — OTC brokers help their clients find trades outside of traditional crypto or securities exchanges, connecting buyers and sellers through private professional networks. OTC brokers provide vital services for traders who need to make substantial orders, which typically accrue high fees and bleed into unfavorable order book positions in exchanges.
Robo-advisors — Robo-advisors are brokerages that provide advice on top of order execution. But there’s a catch: that advice comes from AI algorithms that crunch market data and apply it to clients’ investing goals and market position before they offer advice. Client costs tend to be lower than full-service brokers’ but higher than typical discount brokers.’ Studies show that robo-advisor performance varies considerably, so clients should carefully research their options.
Captive — Captive brokers work with specific insurance or mutual fund companies to sell that company’s products. A captive broker won’t recommend or work with products from outside their company even if it’s in their clients’ best interests. Captive brokers may contract with large companies who need to manage sizable employee stock plans.
So what Kind of Brokerage is Amplify?
So what can you expect when you sign up for the Amplify Brokerage?
Clients trading through the brokerage can access trading pairs across crypto’s top exchanges, ensuring that they’re getting the best price on the market rather than the best price in a single exchange.
Amplify will also leverage over-the-counter networks to help clients execute large trades cost-effectively — without having to go through exchanges and show their hand.
Amplify clients can also choose between Amplify’s “full service” or “discount” brokerage offerings, either paying extra to receive guidance from Amplify’s team of crypto experts or paying less for a DIY brokerage experience.
Picking a brokerage — whether it’s for crypto or any other asset — is not an easy decision. Traders must pay brokerage fees, trust brokerage assessments of market conditions, and in some cases decide whether to act on advice from their broker to make their trading decisions, typically taking on risk in the process. When looking for a brokerage, it’s important to Do Your Own Research. Market knowledge, risk tolerance, return history, trustworthiness, and technological sophistication all affect a brokerages relationship and effectiveness with their clients.
The crypto market is currently under-served by the number of brokerage services available to it, but that situation is unlikely to last forever. Amplify is unlikely to be the last brokerage entering the crypto space. However, we are setting out to be one of crypto’s most reliable and innovative brokerages, combining our crypto expertise, blockchain fluency, and experience from traditional finance to create the Amplify project, which will first launch the Amplify Brokerage before ultimately taking on the form of a hybrid (decentralized and centralized) exchange.
