Many cryptocurrency exchanges have sprouted up and contributed to billions of dollars in trading volumes over the past decade. The Cryptocurrency exchange business offers the chance to buy and sell cryptocurrencies. This can include conventional fiat currencies or other cryptocurrencies.
Some exchanges also allow you to trade based on changes in an underlying asset’s value, like the US dollar/Bitcoin rate. Cryptocurrency exchanges are run by teams that vary in size, from a small operation to massive, global enterprises.
Some exchanges are open to the public, while others are only accessible by invitation. Whatever the status of the exchange, they all exist as businesses to make money.
However, it can sometimes be difficult to tell exactly how they make enough money to keep what seems to be their complex operations running.
What is an exchange?
Cryptocurrency Exchanges enable people to buy or sell virtual currencies, such as Bitcoins and Ethereum, for traditional bitcoin and other digital currencies such as fiat currency or fiat currency associated with a particular virtual currency.
The technology underlying these exchanges allows users to trade in a very liquid and flexible market. As a result, there is never a point where one type of virtual currency overruns another. One of the factors is how quickly currency can be exchanged to determine a Cryptocurrency Exchange’s liquidity factor.
Liquidity is maximized when there is rapid movement, such as millions or hundreds of thousands of new traders entering the market at once. Most exchanges such as CEX.io, will always attempt to ensure high liquidity to ensure smooth trade.
What are the largest crypto exchanges?
Some exchanges rule the roost in both financial terms and volume of trade. The largest by a large margin is Binance which in 24-hour trading volume is over double the second-largest; HBTC. The top 5 largest in terms of 24-hour trading volume ($USD Billions) include:
- Binance: 30.53
- HBTC: 12.57
- Dsdaq: 10.8
- Hydax: 10.73
- Xtheta: 10.15
So as you can see, successful cryptocurrency exchanges make some serious money. But how do they make these kinds of figures?
How crypto exchanges make money
There are several different methods that an exchange will create revenue.
Many exchanges charge a fee for transferring currencies. This is called a deposit fee, which is different from the transaction fee you pay when you make a sale or purchase through the exchange.
When you deposit money into a cryptocurrency exchange, you are buying the currency from them. This is a process called purchasing. Since it is the exchange that you are giving the money to, you have to pay them a fee for this service. This means that if you are trading on margin, you get charged an additional fee.
If you are using a trust-based system, this means that you will need to deposit a certain amount into a wallet to prove that you have sufficient funds (2FA).
Crypto Exchange withdrawal fees are a type of withdrawal fee charged by a crypto exchange when you withdraw cryptocurrency to your wallet. These withdrawal fees vary from exchange to exchange, but most of them offer you a choice; You can either pay a flat fee or a percentage of the amount you want to transfer.
Commissions on trades are perhaps the most common monetization strategy for exchanges, cryptocurrency, and stock exchanges alike. This commission acts essentially as a service fee for brokering a trade between buyer and seller.
In the digital asset exchange market of today, commissions of less than 0.01% are standard. Naturally, this low commission level necessitates higher trading volumes.
Taking an example of a $1,000,000 volume, the exchange would earn a commission of $1,000. Regardless, top cryptocurrency exchanges have daily trading volumes in the millions of US dollars—which generates massive commissions on successful trades.
With some of the most famous exchanges facilitating volumes of billions of dollars, it becomes apparent how lucrative these ventures will become. Digital asset exchanges should see increasing volume and commission revenue as the cryptocurrency market matures and expands.
The early phases of younger cryptocurrency exchanges are inevitably characterized by minimal volume. Due to this, these exchanges cannot rely exclusively on commission revenue during their growth phase. The digital asset exchanges may also offer a service that allows users to list tokens and coins to drive initial revenues.
An exchange may collect a percentage of funds raised from an Initial Exchange Offering (IEO), an Initial Coin Offering (ICO), or a Security Token Offering (STO). Depending on the project, the amount of funding collected may exceed hundreds of thousands of dollars.
However, despite extremely low volumes, some exchanges have nevertheless raked in billions in listing fees. This, in turn, has increased competition for token and coin listings, and as the market matures, the competition becomes far more intense and less assured.
Several exchanges have begun doing so-called “wash trading,” a practice in which they artificially enhance the volume they report on websites that display specific cryptocurrencies’ market capitalization.
This is a way of doing business that is unethical and exploits those just starting out trading more often than not.
Providing liquidity for a given financial instrument is another primary source of revenue for cryptocurrency exchanges. Market making refers to the act of buying and selling a digital asset on your exchange, but at slightly lower prices than on the other exchanges.
As soon as you close the trade on your exchange, you place a different deal which cashes out the first trade difference. Especially in markets with large spreads, this technique works well when it is performed automatically.
IEO, STO, and ICO fund collection
Also, adding an IEO module to the exchange platform can help drive revenue. This idea creates a similar system to crowdfunding works by allowing contributors to get tokens for ETH or BTC before they go to an exchange.
As a fundraiser, how does exchange get paid? They charge a percentage of total proceeds as a fee when they collect funds on behalf of the company. It could mean a significant payout to the hosting exchange, depending on the total amount raised.
Choosing the right exchange to trade with
When you first get into cryptocurrency, one of the first things you’ll need to do is choose an exchange to trade on. When choosing a cryptocurrency exchange, there are a lot of things to consider.
A cryptocurrency exchange can be an excellent place to buy and sell a cryptocurrency, but an inferior exchange can cost you money. You need to check the following things to determine which exchange is the best for your needs:
An exchange’s security is by far the most critical factor. If it’s not secure, criminals (or even the exchange themselves) could steal your funds. This would leave any other advantages meaningless.
Do they use the secure HTTPS protocol? How about 2-factor authentication when you log in? These are essential questions to ask yourself when researching. Those two points are the very basics that you should expect an exchange to utilize, but several other issues related to the technology you should investigate further.
In general, the more liquid a particular exchange is, the faster transactions can be completed without experiencing price volatility.
Popular cryptocurrency exchanges can take severe amounts of income that they serve from the various methods discussed in this article.
There are various means by which an exchange can cheat you out of your money when looking to raise funds. Therefore when using one, common sense and vigilance are recommended.
Nevertheless, most exchanges create their revenue by above-board means and often at little expense to the platform’s user. I.e., their focus is on little income per transaction but a high volume of transactions.