Crypto exchanges are both loved and hated in the digital currency world. Entities like Coinbase, Binance, and Kraken have made it simple for countless people to buy, sell, and trade digital currencies. Many assume these entities make a huge profit with many transactions and massive trade volume seen on many exchanges. A cryptocurrency exchange makes money off of a variety of factors, including deposit and withdrawal fees and fees levied on crypto transactions.
Despite the notoriety of popular digital currencies like Bitcoin, figuring out how much money an exchange makes can be a tricky endeavor. In 2018, Binance made about $3.5 million dollars per day, while the top 20 exchanges as a whole took in about $1 million in profit per day.
Some of these figures changed dramatically by 2020. While some exchanges lost massive amounts of trade volume (and profit), others continue to enjoy greater revenue. Binance CEO Changpeng Zhao said in December that he expected the exchange to reap between $800-1$1 billion in profit. Binance accrued profits of about $570 million in 2019.
While data about the exact profits some exchanges turn can be hard to find, a large amount of information can be found when looking at the different ways exchanges do make money. Keep reading to better understand how a crypto exchange makes money as users conduct transactions.
Fees For Crypto Trades
Charging a commission on each trade is a common way to make money in the financial world. Many exchanges also charge a fee for each transaction.
Fee structures on different exchanges are often a point of controversy, as users will often try to flock to the platform that offers the lowest. Some, like Coinbase, have a more complicated system of fees that depend on the amount of money being transacted.
For example, the exchange charges a varying amount for a trading fee on transactions up to $200. There is an additional fee added for larger transactions. Coinbase touts its Coinbase Pro platform for traders interested in paying fewer fees and want more advanced trading tools. On Coinbase Pro, ‘maker’ and ‘taker’ fees vary based on specific pricing tiers.
Many exchanges appeal to day traders and others with high volume, as they understand the influence of big traders leads to more profit.
Listing fees are a common way for younger exchanges to make money. Many newer platforms struggle to attract enough trading volume to consistently turn a profit and stay afloat. Exchanges operators often will turn to organize ICOs, STOs, and IEOs and collect a portion of raised funds. These ‘listing’ fees usually range from 1-10 BTC and can also be paid in the project’s native token.
While listing fees are a popular tool for smaller exchanges to turn major profits, the competition to be the first to list new tokens and coins has spread across the entire crypto industry.
Exchanges know that being one of the first ones to list a high-potential asset, especially when the Internet is rife about the ‘next big thing’ with financial assets, can drive a lot of trade volume. This has led to the rise of ‘wash trading,’ where exchanges illicitly boost reported trade volumes to present a stronger picture to potential traders.
Starting An Exchange And Turning A Profit
Most of the world’s top-performing exchanges are located in Asia. Scrutiny by some national governments has caused some to leave and set up operations in more crypto-friendly nations, like Malta.
Rules and regulations regarding cryptocurrencies and exchanges are slowly evolving as nations become more familiar with digital currencies and take a strong stance for or against them.
Exchanges that succeed and turn a profit usually have several common factors. They enlist a team of qualified lawyers to file for the right licenses and navigate through any legal hurdles based on the jurisdiction a particular exchange is based in.
They will also work with a qualified development company to build out the exchange infrastructure and adequately beta test operations and the payment processor that handles transactions. Savvy exchanges will promote heavily and offer incentives for users to begin trading, so enough volume can be established for the platform to begin profiting.
Cryptocurrency exchanges will only continue to reap more profits as mainstream interest in virtual currency rises.