Dean
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bitcoin-familyMany people who get hooked on digital currency become so passionate about the subject that they want to change their entire career to work in this industry. Of course there are many different ways you can go about doing that, but one of the most accessible and profitable career choices is to set yourself up as a Bitcoin broker.

Becoming a broker does require you to have some capital behind you, but if you are willing to start small in your spare time and build your business up gradually this shouldn’t be a stumbling block for most people – if you have enough to buy or sell a bitcoin or two for your first trade then this may well be enough to get started. Of course if you have more than that, then things will be a lot easier for you.

The Risks of Being a Bitcoin Broker

There are three main risks associated with becoming a Bitcoin broker: the risk of being scammed, the risk of breaking the law or contravening regulations and getting prosecuted, and the risk of losing money due to fluctuating exchange rates.

Compliance: Do You Need a License to be Bitcoin Broker?

Whether or not you need to obtain a license to legally operate as a bitcoin broker is something of a disputed question. It will also depend on the legal jurisdiction in which you are operating (which includes the location of your clients as well as your own). The safest course of action for anybody considering getting into this business is to consult a legal adviser who can give you expert guidance.

If you live in the United States, for example, it is usually recommended that you obtain a ‘Money Transmitter License’, but with little legal precedent and regulators in individual states taking differing positions, the situation is still unclear. In many other countries, such as the UK for example, the situation is even less clear, as the government is taking a ‘wait and see approach’ to regulation; this usually means that people do not bother to get a license.

Being licensed usually means that you need to comply with certain requirements, such as taking the personal details of clients and keeping records for a certain amount of time.

Even in countries like the US where certain authorities state that digital currency brokerages do need a license, many trades take places on peer-to-peer websites; since ordinary users are free to buy and sell coins without registering as a business, this creates a blurred line for solo traders who are just testing the waters to get started – at which point do you cross the line from being a regular user buying and selling with other users, to becoming a brokerage business that needs to be registered? There is no hard and fast answer to questions like that and you will have to determine for yourself whether your activities may have crossed this blurred line and what your appetite for risking prosecution and fines may be.

Don’t Get Scammed

Scammers do target brokers and you need to take this into consideration. When you take payment using a method through which payments can be reversed or cancelled, and in return for Bitcoins whose transactions cannot be reversed, you are taking a risk. A customer may try to reverse a payment themselves in order to get free coins (which you can usually challenge) or they may be a criminal who pays you with a hacked account, in which case the payment processor themselves may reverse it.

To mitigate against this you need to be well versed in the policies for each of the payment methods you choose to accept and make sure that your prices reflect the comparative risk that you are taking. You can also reduce your risk by requiring ID verification from customers.

Reducing Currency Risk

A broker is often ready to either buy or sell at any time, taking a profit from the difference between bid and ask prices. This does mean, however, than you risk losing money if the price changes significantly. For example, if you buy Bitcoin with the intention of selling it, then the price falls by 20%, then it is highly unlikely that you will be able to sell it without taking a loss.

There is no way to mitigate against this 100%, so you need to make sure you are making enough profit to cover potential losses. But you can reduce the risk in the following ways:

  • Reduce your trade volume or even stop trading during periods of high volatility.
  • Identify trends: If you think the price is falling then reduce your buy orders or place them further from the going rate.

Peer to Peer Marketplaces

The easiest way to get started as a bitcoin broker is to use a peer-to-peer marketplace services where anybody can register and start buying and selling coins immediately. Most of these sites will allow you to choose between multiple fiat payment methods, including national bank transfers and digital wallets like Paypal or OKPay.

As both professional traders and individual bitcoiners use these sites in a very similar way there is no minimum capital requirement – as long as you have enough cash or coins to make a trade you can use a service like this, although there may be a small minimum bitcoin balance for creating your own adverts. You also don’t need to go out looking for customers – you just create an offer or respond to somebody else’s offer.

Of course the other side of that same coin (pun not intended) is that there is a lot of competition when you use something like this. It is also true that reputation – having an established history or trades through that particular site or service – is important. This means that beginners may have to start off by making trades with  no profit, or even at a small loss, in order to build up a reputation and perhaps a few regular customers, before they can start getting any significant amount of business at more profitable prices.

The most popular peer-to-peer marketplace is LocalBitcoins. This site has a good number of users in most countries around the world, and enables trades using a wide range of different payment methods. There is also an active forum where you can network with other brokers and pick up tips and information or ask questions of more experienced traders.

Another interesting service is Multisigna. The technology behind this exchange is more advanced than local bitcoin and is more secure; because it uses multi-sig security users holding coins on the site do not take the same risk, of being hacked or of the site going out of business and taking users’ balances, that you take with a centralized escrow service like LocalBitcoins. But there are fewer payment options and they have significantly fewer users as well.

‘Over The Counter’ Sales

Another way to operate your business is to conduct ‘over the counter’ sales. These are larger sales negotiated with individual buyers and sellers, rather than through placing publicly viewable offers on an exchange.

The advantages of operating like this are that you make a smaller number of larger trades, meaning more profit per trade, and that you will probably not have to pay commission to work through a third party service.

The disadvantage is that you will have to find your own clients, rather than tapping into a large and established client base through on an existing exchange.

You can set yourself up as an ‘OTC’ broker by creating and advertising your own website, or through using something like the Bitcoin OTC Web of Trust. Creating your own site comes with an additional opportunity to act as a broker for alternative cryptocurrencies as well as BTC.

Operating an Exchange

White label exchange services such as the one operated by Leverate allow brokers to set up their own exchange website / app with full trading platform, and even to aggregate liquidity from other exchanges.

This is a highly competitive market which will probably require a significant investment as well as a lot of work to make a success out of, but arguably offers a much greater potential profit than the other options listed here.

And Also…

The LakeBTC exchange is advertising the opportunity to become a ‘LakeBanker’ on their website. They give few details, however, as to exactly what this entails and what terms they are offering. When I contacted them they replied swiftly asking for more details on my personal experience and circumstances, but when I replied saying that I wanted further information for this article they didn’t get back to me. I will leave it to the reader to decide if it is worth pursuing more information about this opportunity.