Current decentralized/centralized exchanges are great for the average crypto trader. It allows individuals to purchase crypto with minimal entry barriers. However, it may not be the best option when investors are looking to execute a sizable trade.

Fragmented exchanges with low trading volumes compared to traditional markets cause liquidity and slippage issues. The introduction of brokerages can address such concerns in order to achieve a more efficient ecosystem within crypto.

Slippage happens when traders receive a different price than expected. It occurs during a delay between a trade being ordered and when it is executed. When slippage occurs in the crypto market, most investors will have to execute the trade at the next best price due to unequal interest in buying and selling.

For example, a trader wants to buy a set amount of tokens, but price differs when they place an order on the exchange. That change has different implications due to their position to buy or sell. The results can lead to better than expected or worse than expected prices as slippage does not refer to a positive or negative movement.

Periods of volatility, large orders, and market orders can all lead to slippage. One quick fix to slippage would be to create a limit order rather than a market order. However, this brings us to the next issue with the current crypto environment – liquidity.

Liquidity is the concept of how a particular token can be bought or sold without affecting the general stability of the token. Cash is considered to be the most liquid asset as it can be easily accessed and spent. Within crypto, liquidity can be measured by the ability of a token be easily converted into cash or other tokens. With thousands of cryptocurrencies available on exchanges, attracting investors and traders can be difficult.

Adding additional trading pairs and exchange listings can improve liquidity. Also, crypto-to-crypto exchanges have better liquidity compared to fiat accepting exchange which goes through a tighter verification process. A low liquidity environment causes volatility and spikes in the prices of cryptocurrency.  Good liquidity often leads to stability and a better representation of the token price.

If I am an ordinary equity investor, I will have to go through an online brokerage that is registered with a regulator within a specified jurisdiction in order to buy/sell equity shares in a stock exchange. Unique from traditional stock exchanges, crypto exchanges remove such barriers by allowing investors to directly purchase their desired token on the exchanges.

This raises the question for the necessity of brokerages in the crypto ecosystem. Full-service brokerage may make sense due to the additional services and face to face interactions offered to clients, but what about investors who are seeking a platform purely for execution?

One option would be to make several smaller transactions across different exchanges over a certain period of time. Alternatively, investors can go through a brokerage which offers both exchanges and OTC platforms as trading options.

I believe brokerage platforms can help such issues by providing the following services:

Exchanges may set the price of crypto assets but large trades usually do not occur from one account. Unlike trading equity investment, finding a crypto broker with market visibility and access ensure investors the best execution for trades of any size, regardless of marketing conditions. Opportunities to improve the way we do banking is one of the most exciting and disruptive parts of blockchain technology.

The post Are Brokerages Needed in Crypto? appeared first on CryptoSlate.

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