The expansion of the digital assets market has increased the need for many crypto exchanges. According to statistics, the number of people that use crypto assets in 2022 is up to 1 billion. In addition, other stats show that the Bitcoin wallets making crypto transactions reached 81 million in 2022.
As more people enter the crypto market, many exchanges emerge to facilitate their transactions. These cryptocurrency exchanges provide a platform where people can buy, sell, store, and trade any digital asset.
But how do crypto exchanges make money? Many exchanges make money through commissions, withdrawal and deposit fees, commissions from trading platforms, market making, lending, listing, transaction fees, etc.
This article offers in-depth information on these revenue streams for crypto exchanges. Read on to learn more.
Every crypto exchange offers a wide array of assets to users. For instance, before you can buy bitcoin on any platform, you must deposit money into your wallet. The options available for adding funds are cryptocurrencies and fiat currencies.
The former may be free since it's crypto, but using fiat currencies will cost you. The fees will be lowered if you use bank transfers to deposit a fiat currency. But debit or credit card payments will incur a higher amount.
The reason is that exchanges must pay the bank or the credit card company some money for processing the transactions.
Also, the deposit fees vary depending on the exchange. While some charge very high, like 11%, some require lower. Moreover, some exchange doesn’t charge deposit fees on payments made through Bank ACH or direct crypto deposits.
For instance, the Margex trading platform allows users to make deposits with bitcoin directly to their wallet. It also charges low deposit fees when using bank cards.
Another way crypto exchanges make money is through withdrawals. Users pay specific fees for the exchange to process their withdrawals. But withdrawal fees vary on these platforms depending on fee structure.
Some popular crypto exchanges, such as Coinbase, require a 1% flat fee on withdrawal plus the standard network fees. Crypto.com, with a different fee structure, charges 0.0001 BTC on Bitcoin withdrawals through the BEP20 network.
Many of the best crypto exchanges currently charge different withdrawal fees depending on the amount involved.
Commissions Per Trade
Transactions with digital currencies take place on centralized or decentralized exchanges. Trading on centralized exchanges is always suitable for newbies. The platform acts as a broker between buyers and sellers. Also, centralized exchanges support margin trading by providing leverage to users.
That’s why a centralized cryptocurrency exchange will charge higher fees on its numerous services. These exchanges make money from the users through commission per trade.
For instance, if a trader makes a $2 000, 0000 trade with a commission charge of 0.01%, the exchange makes $2,000. So, higher trade amounts generate more commission and vice versa.
On the other hand, a decentralized exchange is usually for pro traders because transactions depend on smart contracts and not brokers. The platform doesn’t support third-party interference, allowing users to control their transactions. But these exchanges charge specific trading fees per trade.
While some exchanges charge commissions, others apply spreads on a financial instrument trade. Spreads on a crypto or stock exchange are the difference between the highest purchasing price and the lowest selling price of assets.
The spreads serve as the cost of transactions traders make on these platforms and compensation for brokers. Also, these costs vary because centralized exchanges set different spreads on their platforms to generate revenue.
Listing fees are essential for younger cryptocurrency exchanges to make money. In the early stages of development, the commission fees from users won't be enough because of low trading volumes. So, the exchange collects funds through listing services by charging a percentage of the revenue realized during the initial coin offering.
But the listing fees vary depending on the popularity of the crypto exchange. For instance, a small exchange can charge 0.5 to 1BTC. According to Business Insider, many medium-sized crypto exchanges charge between $50k and $1 million for ICO listing
But a listing fee on hybrid exchanges can range from $1 million to $2.5 million for one token. Since the exchanges have massive liquidity, token owners can be sure of raising higher funds through their ICOs and won’t mind such a percentage charge.
One answer to how do crypto exchanges make money is market making. This method involves providing liquidity on particular crypto. The market maker provides bids and offers (asks) prices on crypto coins and makes a profit from the difference.
A centralized cryptocurrency exchange or an individual can operate as market makers. The profit in market making lies in the bid-ask spread difference over multiple trades. But apart from the difference, market makers sometimes make trades for their accounts, often called "principal trades."
Crypto lending is a Decentralized Finance service that enables investors to lend crypto holdings to borrowers. It allows lenders to receive regular interest on the crypto loan. The interest earning is similar to those earned on savings accounts with traditional currencies.
Cryptocurrency exchanges make money by lending crypto to traders and earning interest and liquidation fees. Crypto loans attract liquidation fees when borrowers miss margin calls.
Exchanges also earn money through Earn accounts. On Earn accounts, crypto holders are charged high interest to lock in their funds with the exchange. The firm loans out the crypto funds at high rates or invest them in decentralized and centralized staking programs.
Crypto lending platforms also charge transaction fees for their services and offer higher rates to lenders who want to lock their funds for longer.
Cross promotion is another strategy used by the best crypto exchanges to make a profit. It involves running advertisements on your platform for another company to spread more awareness.
In the crypto space, giveaways like airdrops are a typical example. An airdrop is a marketing strategy of coin owners in partnership with exchanges to promote their tokens. The process involves sending free tokens or coins to users' wallet addresses. The purpose of airdrops is to create awareness among the crypto community for a new token or coin.
The participants perform a few tasks, which might involve placing a trade or performing transactions on the exchange platform. When the airdrop participants carry out these transactions, the platform charges fees and makes profits.
FAQ On How do crypto exchanges make money
There are many questions about crypto businesses, their operations, and how they make money. Find some helpful answers below.
What are the services of crypto exchanges?
Crypto exchanges are platforms where buyers and sellers of cryptocurrencies can trade the value of digital assets. The platform serves as the meeting point for making diverse crypto transactions. There are two main types of exchanges CEX and DEX.
The centralized exchanges are usually controlled by a central authority and act as middlemen in bitcoin transactions.
Centralized exchanges prevent money laundering by following strict KYC, Anti-money laundering rules, etc. This tight security enables users to trade bitcoin and confidently make other transactions.
Decentralized exchanges, on the other hand, support peer-to-peer transactions. There is no need for a middleman in this type of exchange. Users are responsible for their security using wallets and private keys.
Each of these exchanges allows users to sell bitcoin and other digital assets, but they must pay a specified transaction fee for using the platform.
Which exchange is the biggest now?
Binance is currently the biggest cryptocurrency trading platform. It has the highest 24-hour trading volume and offers users low maker/taker fees. Their fee structure and discounts make them attractive to traders.
Users can trade with over 120 cryptocurrencies. They can also buy the assets with fiat currencies directly or other cryptocurrencies. They also offer exciting features like margin trading, limiting orders, and market orders.
Do exchanges buy crypto?
Crypto exchanges do not directly buy or sell cryptocurrencies. Rather, they create an enabling environment for traders to exchange tokens directly (decentralized) or act as middlemen (centralized) for transactions.
These crypto exchanges will make money through deposit fees, listing fees, commissions, spreads, or lending charges.
Why do crypto prices differ in exchanges?
Prices vary across exchanges during a trading session. This is due to the difference in transaction fees charged across the various platforms. The price differences create an opportunity for traders to buy and sell on different exchanges to make a profit. This method of trading is called cryptocurrency arbitrage.