How do crypto exchanges make money? According to a recent report of Bloomberg, out of all the crypto exchanges available out there, the top ten exchanges are reported to earn as much as $3 million in one day!
This is quite an incredible growth given the fact that the crypto industry is still in its nascent stage coming to existence since 2009 as compared to the historical growth of the other industries that have been around for much, much longer time than it.
You may wonder how these crypto exchanges make such a huge amount of money. Well, this article will clear all your doubts.
As you may know, the crypto exchanges charge transaction fees from all those users who buy, sell, and withdraw crypto coins via these platforms.
This is quite easy to understand. However, you may not know the other intricacies involved in the operation of the crypto exchanges which enables them to make such a huge amount of money, every day.
For example, a few crypto exchanges may charge insane fees in some unique forms while others may charge a very small amount and even offer discounts to their users when they trade in high volumes.
There are also a few specific factors that determine how much money a crypto exchange can exactly make from their users.
Apart from that, the rates of a centralized crypto exchange will vary significantly in comparison to the rates of a decentralized one.
How Do Crypto Exchanges Make Money?
Generally speaking, the transaction fee or exchange rates may vary from one crypto platform or exchange to another which is why you should be very particular about choosing a crypto exchange for your trading needs.
Well, this is the right place to be in order to know the vital stats and trends which will enable you to know why a few crypto exchanges are more profitable than the others.
The ways mentioned above are not the only ones in which a crypto exchange makes money.
Here is the complete list of the ways and forms in which they create their revenue.
A deposit fee is actually the amount charged by the crypto exchanges for transferring currencies through them.
You should not mix a deposit fee with the transaction fee that you pay to the exchange when buying or selling crypto coins through them.
Also remember that when you use a trust based system to trade your crypto coins, you will need to deposit a specific amount of money into your wallet.
This is actually in accordance with the two-factor authentication or 2FA principle which will ensure that you have enough funds to trade crypto coins.
And if you are trading on margin, you will need to pay an additional fee for that to the crypto exchange.
Ideally, you are buying crypto coins from them when you deposit your money into the crypto exchange.
Ideally, this is the process that is called crypto purchasing and you are paying a fee to the crypto exchange for their services provided to you and this deposit fee is what you pay them.
The crypto exchanges will also charge a fee for withdrawing crypto coins from your wallet.
This fee is not fixed which means that it will vary from one crypto exchange to another.
However, most of the crypto exchanges will offer you two options to choose from.
You can either choose to pay a flat fee for withdrawing coins from your crypto wallet or a percentage of the amount you want to take out and transfer.
This is one of the most common ways in which the crypto exchanges or any other stock exchanges earn their income.
These are commissions on trades but these usually act as a service fee.
You can also consider it as the fees for the crypto exchange acting as a broker between a buyer and a seller.
Usually, the standard rate of commissions charged by the crypto exchanges today on exchange of digital assets can be as little as 0.01%.
However, there is a catch here. If you want to enjoy low commission levels you will necessarily have to trade in high volumes.
Given the fact that a crypto exchange facilitates high trading volumes to the tune of millions or even billions of US dollars every day for some particular crypto exchanges, this commission charged on successful trades forms the major chunk of their daily income.
A younger crypto exchange will have to deal with minimal trading volumes in its early stages.
It is for this reason such crypto exchanges cannot rely fully on the commissions earned from trades for their growth.
In such stages and situations, these crypto exchanges may offer specific services such as allowing the users to list crypto coins and tokens.
This will also enable them to create more revenues.
Usually, this listing fee is charged as a percentage of funds raised when a user makes an Initial Coin Offering or ICO, or Initial Exchange Offering or IEO, or a Security Token Offering or STO.
The amounts collected through these methods can often be much more than thousands of dollars, depending on the type of the project, and even a small percentage of it can result in a massive income in form of commissions.
This is how some of the younger crypto exchanges have made billions of dollars in quick time in spite of their extremely low daily trading volumes.
There is one significant point to remember here in this regard.
This specific way being so productive for the crypto exchanges to make money has, in turn, resulted in an increased competition and urge for crypto coin and token listings.
This competition becomes much more intense as the market matures with a risk of little assurance.
There are several instances where several different crypto exchanges are engaged in ‘wash trading.’
This is a process that enhances the volume of crypto coins artificially.
This is done by increasing the volume of the crypto coins in their report on those particular websites that display the market cap of particular crypto coins.
This is an unethical way to make money by some crypto exchanges.
This practice affects and exploits the beginners in the crypto space and also those who do not trade crypto coins often.
The crypto exchanges also play a significant role in giving liquidity to a specific crypto asset. This is another primary source of income for them.
This process is called market making which actually means buying and selling crypto assets over an exchange.
However, the price is slightly lower in this case.
In this process, a trade is closed on an exchange and as soon as it is done, a different deal is placed.
This new deal is placed with intent to cash out the difference in the first trade.
Ideally, this technique is usually performed automatically and is followed in a market that typically comes with large spreads.
Factors to Select the Right Crypto Exchange
Now that you know about all the ways in which a crypto exchange makes money from their users, you should make sure to choose the right one to trade your crypto with so that you do end up selecting one that follows unethical practice.
If you choose an inferior crypto exchange it will cost you more money while trading which will eat away your profits.
Therefore, here are a few factors to consider while choosing a crypto exchange:
- Security – If the crypto exchange is not secure, you stand a high risk of losing your money, and, at the same time, all the other advantages provided by it will be literally meaningless.
- Liquidity – The Crypto exchange should offer more liquidity because that will determine how fast you can complete a trade without having to experience the effects of price volatility.
- Location – You must also check the location of the crypto exchange before you choose one because it is very important that it covers your jurisdiction. This will not only reflect their target market but will also ensure that they follow the crypto regulations within your jurisdiction.
- Volume – The volume of trade and the number of users will also play a significant role in the exchange facilitating crypto trades. Lower volumes will mean higher prices of crypto assets for buyers and lower for sellers and smaller number of users will result in a longer wait time to find a suitable buyer or seller.
- Coin types – Check the type of crypto coins traded on the exchange as well. Most crypto exchanges deal with coins with higher market caps and therefore you may have to look for smaller exchanges that deal with lesser-traded coins.
And, most importantly, check the fees charged by the crypto exchange, which is what this article is all about.
Choosing one with a native token may lower your transaction fees when you pay them in their coin.
However, make sure that you understand the terms and conditions as well so that all these make sense for the particular type of trade you want to make on that particular crypto exchange.
It is essential to know how crypto exchanges make money in different methods. All these are discussed in this article. With such knowledge you will be able to avoid those that are scams and are out there to raise funds by cheating you.