Although some cryptocurrency exchanges are now worth billions of dollars, how can they start out profitable?
Cryptocurrencies like Bitcoin and Ethereum are becoming extremely popular. Due to this, cryptocurrency exchanges like Coinbase and Binance have seen significant increases in their values and earnings.
How precisely do these bitcoin exchanges make all of their money, though?
1. Trading Fees
Trading commissions are generally a portion or a percentage of the entire amount you trade.
Consider purchasing $100 worth of Bitcoin on a trading platform with a 0.1% trading fee; this would cost you an additional $10 for the transaction.
These costs can mount up, especially if you are an active trader who buys and sells frequently, despite the fact that they are typically rather low—often between 0.1% and 0.5% each deal.
With a daily volume of nearly $76 billion, such modest transaction fees produce enormous revenues for cryptocurrency exchanges like Binance.
2. Withdrawal Fees
Another significant revenue stream for centralized or decentralized cryptocurrency exchanges is withdrawal fees.
There are normally fees associated with withdrawing cryptocurrency from a cryptocurrency exchange and putting it in your personal wallet. And such charges may build up, particularly for aggressive traders who often move assets.
Exchanges profit from fees, despite the fact that systems like Bitcoin and Ethereum justify them by arguing they aid in network security.
Consider transferring 1 BTC from your Binance account to your Trezor wallet as an example. For such transaction, Binance will charge you a 0.0005 BTC network fee via BTC (Segwit).
As of this writing, that equals around $13.
3. Listing Fees for New Cryptocurrencies
For the privilege of listing their tokens for trade on a cryptocurrency exchange, some exchanges charge crypto projects hefty listing fees. These listing fees might be in the millions of dollars, depending on the exchange and the project advertised.
A cryptocurrency project gains enormous exposure and legitimacy when it is listed on a significant exchange.Projects are prepared to spend a lot of money to gain access to all of those prospective buyers and sellers of their cryptocurrency on centralized cryptocurrency exchanges like Coinbase and Binance since they have millions of users.
The fees also assist bitcoin exchanges in defraying the expense of adding a new cryptocurrency. To get a new coin to function effectively on the exchange’s platform, development work is needed.
Additionally, compliance expenses exist because exchanges must review projects to minimize legal risk.
4. Affiliate or Referral Programs
Many cryptocurrency exchanges provide incentives to current users who suggest new members.
The goal of these cryptocurrency exchanges’ referral programs is to encourage users to suggest the service to their friends and followers via social media and other channels.
Every referral has the potential to bring in a lifelong client who will provide ongoing crypto exchange revenue. Links are marked with a user’s referral code in order to track referrals.
The referrer is credited for any activity or revenue earned when a new user registers through a referral link.
As an illustration, Coinbase has a referral program that rewards users with $10 in Bitcoin for each member they suggest. Binance has a substantial multi-level referral program that rewards referred customers with up to 40% in ongoing commissions from their trading costs.
5. Crypto Loans
Bitcoin-backed loans are made available to retail and institutional borrowers via cryptocurrency exchanges like Binance, Crypto.com, and Nexo. The loans have security.
By doing this, the borrower pledges cryptocurrency assets worth greater than the debt as collateral. The lender has the right to take the security if they don’t pay.
Here’s an illustration of how to use Binance to borrow money.
You want to keep one Bitcoin for the long term, but you need money. You borrow $20,000 from Binance for six months at an interest rate of 8%, using your one Bitcoin as collateral.
You receive the money and keep your Bitcoin. You receive your one BTC collateral back if you repay the loan in full and on schedule. Otherwise, Binance sells the Bitcoin to reclaim the $20,000 capital and accrued interest.
6. Initial Exchange Offerings (IEOs)
Initial Exchange Offerings (IEOs) are similar to Initial Coin Offerings (ICOs), except that they only make their tokens available on a single exchange platform.
Initial Exchange Offerings (IEOs) for hundreds of new cryptocurrencies have been hosted by cryptocurrency exchanges including Binance, Huobi, and KuCoin. By charging startup projects listing fees and a cut of the tokens sold during the IEO, they profit.
For instance, a new token may pay Binance up to $1 million in exchange for the right to execute an IEO on Binance Launchpad. Additionally, Binance retains a portion of all token sales made via its IEO platform.
IEOs are promoted by cryptocurrency exchanges as a safer alternative to ICOs for investors, and firms holding IEOs have access to the exchange’s current user base for marketing purposes.
Between 2017 and 2019, IEOs skyrocketed in prominence, enabling exchanges to make millions more during bull markets for cryptocurrencies. But once the buzz subsided in 2020, IEOs fell off.
7. Premium Services
To diversify their income sources, several cryptocurrency exchanges provide premium subscription plans that grant customers access to exclusive features and advantages.
They provide paid monthly subscription levels with benefits including lower trading costs, more earning potential on crypto lending, and bigger purchase/withdrawal limits.
For instance, Coinbase offers Coinbase One, which features zero trading costs, cutting-edge trading tools, increased staking rewards, and priority support for a monthly subscription of $29.99.
Power users, traders, and institutions who conduct numerous transactions and want to maximize account advantages are the target market for these subscription packages.
8. Yield Farming
In contrast to crypto staking, yield farming enables cryptocurrency owners to “lock up” their assets in return for benefits. By providing yield farming pools, which bring together lenders and borrowers, the exchanges make this possible.
Users may deposit their cryptocurrency into the exchange’s pool to earn interest. Then, institutional borrowers, market makers, and leverage traders who pay interest to borrow the assets are given access to these pooled assets. The exchange charges a fee that is deducted from this interest rate.
For instance, Binance would lend out your ETH to earn interest if you placed it into its ETH 2.0 staking pool.
They would distribute a share of the yield to you (paid in 1:1 marketable Binance ETH).
Cryptocurrency Exchanges Make Loads of Money Behind the Scenes
Cryptocurrency exchanges make a lot of money through various fees, including trading fees, withdrawal fees, listing costs, and more.
Of fact, customers may end up paying a lot of these fees. Therefore, read the small print carefully before signing up for an exchange. Find one with affordable prices by shopping about.
When you first start using cryptocurrency, be wary of exorbitant fees that can reduce your investment. The objective is to increase your profits, not to line a bitcoin exchange’s coffers.