Crypto Fundamentals: How Stock Exchanges Make Money

Welcome to the first in PYMNTS ‘series on the basics of the crypto industry. In it, we will look at how the market works and does not work, the various companies and players that make it work, and the driving rules that – ideally – keep it afloat.

So, how do cryptocurrency exchanges make money?

Well, at the core, cryptocurrencies make money on trading fees: When you buy or sell something, you pay the exchange a cut. These vary drastically with the size of the trade and often by the trader’s monthly volume – and of course there are withdrawal fees for off-ramping funds.

Customers also pay blockchain trading fees, but they do not go to stock exchanges.

It is also worth noting that we are talking about centralized exchanges such as Binance, Coinbase and FTX, non-decentralized finance (DeFis) decentralized exchanges, known as DEXs.

The popular, listed Coinbase exchange fees start at 1% – 0.6% for the recipient and 0.4% for the manufacturer up to $ 10,000. At the other end, $ 500 million plus, the takers pay $ 0.05 and make nothing. On the other hand, the best global exchange, Binance’s fees start at 0.1% for producer and recipient – and fall to 0.04% for recipient and 0.02% for producer.

See also: Swiss regulators want more protection for crypto investors

Exchanges with a strong reputation, user-friendly interface and high profile have been able to attract higher fees.

Still, as trading volumes fall and the crypto winter sets in, they make less money. A volatile market – and crypto is in the best of times – is good for stock markets, as it encourages traders to play in the market. A steady downturn, on the other hand, discourages trade.

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

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

It is happening across the crypto industry, according to a recent report from Glassnode. Down almost 38% in June shows bitcoin activity in the chain – or bitcoin moving from one wallet to another – down 13% from November’s peaks at the height of the bull market.

Related: Crypto’s celebrity recommendations attract customers, critics reject

“Bitcoin has seen an almost complete expulsion of market tourists, leaving HODLER’s determination on the line,” Glassnode said. HODLERS – which means hardcore bitcoin and crypto believers like “Hold On for Dear Life” – do not tend to sell, however.

And the fee reduction could get worse – at the moment at least.

On June 22, Bloomberg reported that Binance.US, the company’s US stock exchange, could start a price war, or join one started by Robinhood, by going over to zero fees – which the largest and richest stock exchange, without a doubt, can afford to in the pursuit of customer acquisition.

This can be compensated by making money on the bid-ask spread or – as Robinhood showed in the GameStop debacle – by directing orders to tax-paying market participants.

Lending

Apart from trading fees on spot and derivatives trades, stock 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 have also made good money on “Earn” accounts, also known as lending platforms, where crypto owners are given very high interest rates to lock in funds that stock exchanges – and independent lending companies – lend at high prices or sometimes. invest in DeFi and centralized intervention programs.

The Securities and Exchange Commission (SEC) is trying to change that, after warning Coinbase not to start one in November. The SEC also settled a $ 100 million lawsuit against an independent crypto-lending company, BlockFi, earlier this year.

Read more: BlockFis’ $ 100 million settlement with the SEC increases internal discussion

Questionable

SEC Chairman Gary Gensler has accused the crypto industry’s exchanges of a number of dubious practices, particularly customer marketing and cutting-edge trading orders.

Stock exchanges “often trade with their clients because they are market-oriented toward their clients,” Gensler said recently in a hearing in the House Financial Services Committee, asking for tougher regulation and more authority for his agency. “Without a police officer and no driving rules, market participants can send your orders in advance.”

Services

The major crypto exchanges have issued Visa and Mastercard-marked debit cards that allow users to use crypto at online and physical sellers. It provides withdrawal fees in addition to any card-related fees.

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

Tokens

A number of exchanges have their own exchanges that offer discounts on trades and other fees when customers use them to buy and sell.

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

Other

Many stock exchanges launch investment arms that are mainly seed and venture capital firms, and an increasing number are launching marketplaces for non-fungible tokens (NFT).