Dealing with a cryptocurrency exchange platform and trading cryptocurrencies via a regular brokerage company seems to be identical for the majority of retail traders/investors. Although that could be true until a point, several differences must be discussed. What’s important to note before we start is that both approaches come with upsides and downsides, and it will be the purpose or the action determining which one will be suitable.
Buying the underlying instruments
Working with a cryptocurrency exchange platform means that people can buy the underlying instruments. They will hold tokens in a wallet that could be used for different activities (shopping, salary payments, cross-border transactions, etc.) or to be stored and sold at a later date for a profit. This is still the main way to buy physical tokens and despite their weaknesses, people must work with exchanges.
Short-selling is not possible in this case and security concerns (several exchange platforms had been hacked during the past three years) could kick in when working with exchanges. If owning tokens is not our goal, then cryptocurrency trading could be the best approach.
Profiting from volatility
In this case, traders/investors are not buying any underlying instrument but trade derivatives that track the exact performance of the underlying instruments. Futures contracts, options, or CFDs based on crypto are some of the most popular derivatives in 2020. Since we don’t know how the market can perform during an economic downturn like the one we’re about to witness, an increasing number of people are attracted to the growing derivatives market.
Short-selling is enabled, allowing traders to profit from the market volatility on both rising or falling markets. On the negative side, derivatives are designed mainly for short-term trading, which makes using exchanges the only solution for people who want to invest long-term into a particular cryptocurrency.
Choosing the right path
Both approaches carry several particularities which means none of them is appropriate for 100% of the people. Some may see cryptocurrencies as a store hold of value and aim to keep tokens for years. Others are just interested in what the market will do during the next few weeks and thus choose crypto trading. There are also many alternative ways to make money in the crypto industry, so it will be a mistake to believe that there’s only one ideal path to get involved. Education and understanding of how the market works are the most important variables that can determine whether choosing a particular cryptocurrency niche will generate returns or not.