How Do Crypto Exchanges Make Money?

The crypto industry is witnessing an unprecedented rise in its fortunes. There are multiple factors responsible for boosting the growth of the sector. The attitudes towards cryptocurrencies are also changing since, unlike in the past, the mainstream media and the politicians are talking favorably about it. There are many reputed crypto exchanges with users around the world. Although millions of crypto users sell, buy, and trade cryptocurrencies daily, many may not be aware of a basic question: “How do crypto exchanges make money”? This article will delve deep into the numerous ways in which leading crypto exchanges earn money and the factors that affect their income flows.

Ways in Which Crypto Exchanges Earn Money

A cryptocurrency exchange is a digital marketplace where crypto users can buy, sell, or trade cryptocurrencies along with other digital assets. These platforms are the essence of the cryptocurrency economy and are responsible for altering market prices, offering financial services, and creating liquidity.

Trading Fees

Trading fees are currently the main source of income for almost all cryptocurrency exchanges. Whenever a user purchases or sells off their crypto, the exchange charges a small percentage of the transaction. As the trading volume increases, the small fees quickly pile up and become a significant source of income for the crypto companies.

Presently, most exchanges use the “maker-taker” model to determine fees. The makers can add liquidity to the market by placing limit orders that usually charge lower fees. The fees may range from 0.1 to 0.5% per transaction. It may depend on the exchange and the volume of trading. 

Trading fees become highly profitable only when the exchanges experience high volumes. Some exchanges may carry 90% of the revenue from transaction fees. The cryptocurrency exchanges will encourage high volumes and offer discounts for high-frequency traders.

Deposit and Withdrawal Fees

There are deposit and withdrawal fees that vary significantly depending on the type of transactions and currencies. The withdrawal fees are one of the main ways in which crypto companies charge users when withdrawing money. Some exchanges charge a fixed fee while others revise it accordingly. Some exchanges, for instance, charge 0.0005 BTC, approximately $17. The fees help in covering exchanges that several users use. The fees also contribute enormous revenue for popular exchanges with several million users.

All cryptocurrency exchanges support fiat currency deposits such as USD and EUR. These are often carried out with bank transfers. These exchanges charge fees for transactions that are made with both debit and credit cards. Although the deposit and withdrawal fees are not as high-yielding as trading fees, they are an important source of income. 

Listing Fees

Listing essentially means making a cryptocurrency visible on an exchange. Tokens can gain visibility only when many exchanges list them. Depending on the token’s project, the exchanges charge listing fees. The listing fees increase phenomenally only when there is an exponential increase in visibility and adoption. These exchanges capitalize on demand. The listing fees can be as high as $10K, while top cryptocurrency exchange platforms may charge $1 million. Therefore, there is a positive correlation between listing fees and the popularity of the crypto exchange. 

Initial Exchange Offerings (IEO)

The Initial Exchange Offerings denote a method of a cryptocurrency project that raises capital by selling tokens directly to crypto platforms. The fundraising method is one of the most popular methods now, after the recent decline of Initial Coin Offerings (ICO). The process can be lucrative only when the selection process is lucrative and has high levels of credibility. Token sales also determine the amount of revenue that an exchange can generate. It may include price, supply, or any discounts or bonuses for participants. 

Token distribution and secondary market trading are also important factors. If the post-sale tokens become tradeable on the exchanges, then buying, selling, and trading can lead to more transactional charges. A successful crypto project can be a windfall for most exchanges, provided there are no major legal issues.

Factors That Determine How Much Crypto Exchanges Can Make Money

There are several sources from which crypto exchanges earn money. However, it would be erroneous to assume that all these sources can generate money on their own. There is a combination of factors that determine how much those sources can generate.

Transaction Frequency

If the transaction frequency is high, then the transactional fees naturally reflect that reality. There is an inverse correlation between high withdrawal charges and transaction frequencies. Many crypto companies intentionally raise the withdrawal charges to discourage users from frequently moving their digital assets to other rival exchanges. 

User Loyalty and Retention

The withdrawal fees, deposit fees, and brand value are all intertwined. The user retention and trading volume can boost profitability only if they increase. The reverse is also true. Therefore, crypto exchanges try to retain users by keeping fees that are neither unreasonably high nor low.

Strategic Behaviour

Crypto users may consolidate withdrawals to avoid the repetition of fixed fees. During promotions, exchanges often reduce their percentage fees, such that costs come down. Similarly, if there is a new coin, the exchanges may examine its potentialto  keep it at competitive rates, and provide more features at those rates depending on the prevailing situation.

Diverse Assets

Cryptocurrency exchanges that have diverse assets usually have normal transactional charges because they have a wider customer base. Both seasoned and casual traders usually prefer such exchanges.

Trading Volume

This is by far the most decisive factor that makes money. The higher the trading volume, the more the level of enthusiasm, and this invariably leads to more income for exchanges. 

Advertising

Advertising and premium services help exchanges earn revenue to display sponsored content. The sponsored content may include advertisements on new cryptocurrencies, ICOs, and other allied services. The monetization strategies include cost-per-impression (CPM), cost-per-click (CPC), and other leveraged costs. It may involve targeted audiences to maximize an advertisement’s effectiveness.

Premium services are a rare but effective method to earn revenue. It requires offering advanced trading features such as allowing margin trading with higher leverage limits, superior security systems, and exclusive trading pairs.

Final Thoughts

There are multiple ways in which crypto exchanges make money. The sources include trading fees, interest on loans, transaction fees, and premium subscriptions, and the list keeps on increasing since exchanges are evolving too. The factors mentioned above also play a pivotal role in the earnings of these exchanges. Therefore, given the right guidance and strategy, launching a cryptocurrency exchange can be a lucrative opportunity. Many companies, such as PayBitoPro, allow new users to launch their exchanges in just three minutes. The best aspect of earning money through exchanges is that one does not need to devote his entire waking hours. Some provisions allow people to turn these exchanges into a second source of income, too.