Crypto Fundamentals: How Exchanges Make Money

Welcome to the first in PYMNTS’ series on crypto industry fundamentals. In it, we’ll look at how the market works and doesn’t work, the various firms and players that drive it, and the rules of the road that – ideally – keep it running smoothly.

So, how do cryptocurrency exchanges make money?

Well, at their core, crypto exchanges make money from trading fees: When you buy or sell something, you pay a deduction to the exchange. These vary greatly depending on the size of the trade and often the trader’s monthly volume – and there are, of course, withdrawal fees for off-ramping funds.

Clients also pay blockchain trading fees, but they do not go to the exchange.

It is also worth noting that we are talking about centralized exchanges like Binance, Coinbase and FTX, not decentralized exchanges of decentralized finance (DeFi) known as DEXs.

The fees for the popular, publicly listed Coinbase exchange start at 1% – 0.6% for the taker and 0.4% for the creator up to $10,000. In the end, over $500 million, takers pay $0.05 and producers do nothing. In contrast, fees for top global exchange Binance start at 0.1% for maker and taker – and drop to 0.04% for taker and 0.02% for maker.

See all: Swiss regulators want more protection for crypto investors

Exchanges with a strong reputation, user-friendly interface and a high profile are capable of attracting high fees.

Still, they are making less money as trading volumes drop and the crypto winter begins. A volatile market – and crypto is in the best of times – is good for exchanges because it encourages traders to play the market. A stable down market, on the other hand, discourages trading.

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These have declined significantly. The block put the crypto’s monthly trading volume at a high of $2.23 trillion in May 2021, at the height of the year’s first bull market, rising to $670 billion in July and $1.4 trillion in November’s second bull market. This June, it was $622 billion.

Like most other major exchanges, it has high-service over-the-counter (OTC) desks that handle trades privately for institutional clients. Fees are generally lower than standard trades, but can be negotiated by the client.

According to a recent report from Glassnode, this is happening across the crypto industry. Down about 38% in June, bitcoin shows on-chain activity – or bitcoin moving from one wallet to another – down 13% from its November high at the height of the bull market.

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“Bitcoin has seen an almost complete expulsion of market tourists, leaving the resolution of HODLers as the last line,” Glassnode said. HODLers – which means hardcore bitcoin and crypto believers who “hold on for dear life” – don’t tend to sell though.

And the drop in fees could be even worse — at any rate for the time being.

On June 22, Bloomberg reported that Binance.US, the firm’s US exchange, could start a price war, or join one started by Robinhood, by moving to zero fees – the largest ever. The richest is the exchange, which can be followed. of customer acquisition.

This can be offset by making money on bid-ask spreads or – as Robinhood demonstrated in the GameStop debacle – by placing orders to fee-paying market makers.

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Loan

In addition to trading fees on spot and derivatives trades, exchanges make money by lending to margin traders, earning interest and liquidation fees when margin calls are missed – something that happens very often, given the volatility of crypto.

They’re also making good money on “earnings” accounts, also known as lending platforms, with very high interest rates for crypto owners to lock in funds – and standalone lending firms. – Invest in loans at high rates or sometimes in DeFi and centralized staking programs.

The Securities and Exchange Commission (SEC) has tried to change that, warning Coinbase not to launch one in November. The SEC also settled a lawsuit against BlockFi, a standalone crypto lending firm, earlier this year for $100 million.

Read more: BlockFi’s $100 million settlement with the SEC sparks internal discussions

incomplete

SEC Chairman Gary Gensler has accused crypto industry exchanges of several questionable practices, most notably market-making and front-running trade orders against clients.

Exchanges “are often trading against their clients because they are market-marking against their clients,” Gensler testified at a recent House Financial Services Committee hearing calling for tighter regulation and more authority for his agency. Gave. “Without a cop on the beat and few rules of the road, market participants can push your order.”

Services

Major crypto exchanges are issuing Visa- and MasterCard-branded debit cards that allow users to spend crypto online and at brick-and-mortar merchants. This accrues withdrawal fees in addition to any card-related charges.

Many exchanges offer professional custody services. Coinbase Custody is an independent, separately regulated entity that mostly caters to large and institutional clients.

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token

Many exchanges have their own exchange tokens that offer discounts on trades and other fees when customers use them to buy and sell.

Binance was an early leader with its utility token, BNB. It has since expanded dramatically when Binance created its own blockchain, Binance Smart Chain, later renamed BNB Chain, which uses BNB for on-chain transaction fees.

other

Many exchanges launch investment arms that are essentially seed and venture capital firms, and a growing number are launching non-fungible token (NFT) marketplaces.

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