When I am writing this article, every where I am observing that people are talking about investing in cryptocurrency. Crypto exchanges have been spending millions in ads to gain attention from investors. But, have you ever thought how crypto exchanges make money?
Bloggers, Instagram influencers and Youtubers have been promoting aggressively as crypto exchanges prefer influencer marketing method the most for their business. At the same time, the number of investors, speculators and short-term crypto have been soaring rapidly.
According to The Economic Times, in April 2020, the total amount invested by Indians was $923 million and in May 2021, the total amount invested by Indian grew by 612% and the amount was $6.6 billion.
Certainly a massive growth!
Another surprising data comes from the United States of America. According to the report by Nasdaq, 46 million American (about 17% of adult population) own Bitcoin as on May 14, 2021.
Each and every transaction is done using crypto exchanges. Therefore, it becomes fascinating to know how these platforms make money.
Let’s first understand what the cryptocurrency exchanges are.
What is a Cryptocurrency Exchange
Crypto exchange is the platform that allows people to buy or sell virtual currencies, such as Bitcoin, Ethereum, Dogecoin, etc. It is the mediator between buyers and sellers. The top crypto exchanges have low fees and strong security features. Different exchanges have different features and costs.
Two types of transactions can be done using crypto exchanges.
- Local fiat currency to cryptocurrency
- Cryptocurrency to cryptocurrency transaction
There are basically two types of cryptocurrency exchanges.
1. Centralized Cryptocurrency Exchanges (CEX)
The centralized exchanges are operated by the profit-oriented company or third party to conduct the transactions. These exchanges helps to secure your digital currency.
One can use centralized exchanges for trading and investing as it is possible to make transactions from fiat to cryptocurrency and cryptocurrency to currency. These transactions are authorized by the central authority which means the exchange.
If we talk about the drawbacks of CEX, there are chances that these exchanges can be hacked and users have also faced server downtime. Another disadvantage is that, it does not support smart contracts.
2. Decentralized Cryptocurrency Exchanges (DEX)
Decentralized exchange refers to peer-to-peer cryptocurrency transactions without a central authority. The trades are executed based on automated smart contracts in which there is no need of an intermediary.
Users get high-level of security and there are very less chances of server downtime.
The disadvantage of DEX is that it does not support fiat to cryptocurrency transactions.
How Crypto Exchanges Make Money – Case Study
You must have heard the names of cryptocurrency exchanges like Coinbase, Binance, CoinDCX, WazirX and so on.
All these exchanges allow the investors and traders to buy and sell cryptocurrency. The crypto exchanges set prices based on the buying and selling activities and the supply and demand of the users.
Exchanges earn profit from different transaction and maintenance fees. The largest cryptocurrency exchange costs more because it is 24 hours trading volume. There are many different ways that exchanges will generate revenue. This is as follows:
1. Commission fees:
When you buy or sell cryptocurrencies, exchanges charge the transaction fees for every trade. This is the most popular way to generate revenue. These commission charges are different in all exchanges. It depends on the volume of the market.
If the commission charges are low, the trading volume is high. The commission charges range between 0.1% to 1%. The commission fees also depend upon which service is used by an individual.
Also read: How Spotify Makes Money
2. Listing Fees:
The exchanges charge a big amount from the owner of the company or coin to listing their coins in crypto exchanges. The listing fee depends upon which exchange a company should list its coins.
The fee ranges from $50,000 to more than a million dollar. If the currency is already popular and millions of people are considering buying the currrency, the listing charge will be high. Also, if the market capitalization of the currency is high, the fees will be higher.
The exchanges raise the fund from,
- Initial Exchange Offerings
- Initial coin offering
- Security token offering.
3. Withdrawal fees:
Crypto exchanges charge fees to the traders when you withdrawal your currency to your wallet. There are two offers while withdrawal the money. You can either choose a flat free or a share of the sum.
4. Deposit Fees:
Many exchanges charge deposit fees when you create an account. After paying the deposit fees, you can buy the currency and trade in the market. You have to pay them a fee for this service. This also includes transferring of currencies.
5. Market Making:
Exchange is the platform where all buyers and sellers exchange their currency. When a company or an individual lists their coin in an exchange, the exchange will promote their coin in different ways.
For promotion, the currency creator will spend money on promoting the currency. It plays a huge role in maintaining liquidity. The exchanges allow the crypto investors to buy and sell newly launched crypto.
This is how cryptocurrency exchanges make money in millions. I would recommend you to select the right crypto exchange based on your requirement. For example, if you want to hold for long run, you can opt for well-establish crypto exchange. On the other hand, if you want to trade, go for an exchange with lower commission fees.
Finally, choosing the right exchange to trade in the market is the most important thing to learn because the security of your funds is essential.