How do crypto exchanges make money? We all know centralized crypto exchanges are making huge bucks, both in the bear and bull market, but how do they do it?
First, we need to make clear that all the ways in which centralized crypto exchanges are making profits aren’t 100% legal or moral, but they are doing it anyway. To be honest, the profits are so huge I don’t think any of us would do things differently and all considered, it isn’t strange that we hear some people asking for crypto trading regulations on daily basis. Some of the biggest crypto exchanges like CEX, Binance, Coinbase, etc, are making up to three million $ daily on trade fees only, which is enough money to forget the rules of law or clean conscience.
If you want to know the difference, pros, and cons between DeFi and CeFi, read our article on this topic here.
Clean ways of making profits
1. Transactions fees
As I mentioned, the most important and biggest profit generator in the exchange business is transaction fees. Although these percentages look small, from 0.01% to 1% depending on the exchange, trading amounts, and the fact that if you are a taker or a maker, these percentages build up nicely and make almost a billion $ in gains a year for leading centralized exchanges.
If you are selling crypto and your order gets executed fast you are considered a taker because you are taking from the liquidity pool and if your order stays longer in the order list, you are considered a maker because you are filling the trade pool.
For example on Binance, the leading centralized crypto exchange, your fee will be in a range of 0.02% up to 0.1% for makers, or 0.04% up to 0.1% for takers. The percentage varies drastically depending on the size of the trade and often by the trader’s monthly trade volume on the exchange.
If you are trading on the Coinbase exchange, your fees will go from 0.6% up to 1% for the taker and from 0.4% up to 1% for the maker that trades up to $10,000 worth in crypto. These percentages are going down as trade amounts go up and at the end, if you trade $500 million-plus, takers pay 0.05% and makers pay nothing at all.
2. Listing fees
Most exchanges charge the listing of new tokens one way or another. Some smaller crypto exchanges charge $50k to list new coins and big ones will charge from $1 to $2.5 million, especially if low trade volumes are expected. This tool is a nice money maker and even if it looks like a robbery, most of the crypto projects wouldn’t become important if they weren’t listed on major crypto exchanges. Of course, if a token is already important and is listed on major exchanges, the small ones will probably list it for free if they presume to get solid trading volumes.
3. Withdrawal fees
These fees are calculated in percentages or as a flat fee for moving crypto out, or fiat money from the crypto exchange in offramp service. This tool isn’t too strong gainer because there are not so many withdrawals as there are trades, but it adds up to a nice pile after millions of users withdraw some of their assets sometimes.
4. Loyalty tokens issuing
Crypto exchanges are often issuing their own token and incentivize trades with them, use them as rewards for staking, etc. One nice example of an exchange token is the BNB coin from Binance. They are giving so many advantages to their coin compared to other ones, smaller trade fees, better staking rewards, and other incentives to push its value and useability heavily. This coin is now on a top 10 list on all important counts, including market capitalization, trade volume, or coin price. Of course, by building a coin’s value, the crypto exchange makes enormous financial gains.
Shady ways of making profits
Just to be clear, this crypto exchange’s money-making tool isn’t a fraud as an idea and I put it in a shady part because it has too much potential to become one. Lending is supposed to help traders get funds to expand their funds and make bigger profits, but it evolved into borrowing money to margin and leverage traders, who often lose enormous amounts of money in which case the crypto exchange makes a profit.
This potential fraud scheme works like this. The regular trader puts a trade order with his coin in x10 leverage and the exchange covers his 1000$ investment with 9000$ leverage. If his coin’s price rises to his targeted level, he makes a profit like he invested 10 000$, but if this coin drops 10% he loses his 1 000$, again as he invested 1 000$. The grey area in this service is in fact that exchanges are able to manipulate prices and fix them to liquidate major leverage traders, which happened too many times in the past.
2. Market making
Market making actually is a key element in our everyday trades and it is supposed to balance buying and selling prices on trading pairs on a crypto exchange. This complex algorithm needs to monitor a particular coin’s price on other exchanges and keep its price in a range with the general market so you don’t overpay or undersell it. In fact, this instrument is essential for exchange to operate and I believe the majority of crypto exchanges don’t use it to cheat us, but it also can be used in this manner without our knowledge.
The problem with this instrument is in fact that users can’t follow some small percentages and several seconds in latency in prices on different crypto exchanges, and the exchange owners can take advantage of this to purchase crypto with some decimal percentage discount. As it goes with transaction fees, it also stands here, small amounts add up to some serious pile of money…
Fully illegal ways of making profits
1. Front-running trade orders
Crypto exchanges are able to manipulate the orders list by putting favorite orders in front of regular users. This way they cheat the market and use their power to buy or sell coins with slightly better conditions. Because these transactions are going at high speeds and users have no chance to track them all, this is probably a tool used on every centralized exchange in some quantity.
This instrument would be a complete fraud if we had a way of proving it, but the chances for it are too small or non-existing at all.
2. Withdrawal denials
I put this in a fully illegal instrument for crypto exchanges to make a profit because if someone forbid you to pull out your assets at the moment when the worth of these personal belongings is falling like a rock, they are doing you direct harm and should be considered as a serious crime, imo. The problem with this is the fact that exchanges have enormous financial funds at their disposal and huge teams of lawyers and minds working on washing their hands and explaining these actions as a necessity.
There are some possible explanations for the shady behavior of some exchanges management, but let’s be honest here, where it is a so huge amount of money, there will be always someone willing to take a risk of taking some of it. Crypto exchanges have too much space to make huge regular and clean profits, and I believe they should be punished harshly for taking shortcuts on us.
Anyway, if you don’t want to take a risk by giving access to your money to any third party, you can always learn more about decentralized exchanges and use them. Stay safe and always remember, not your keys = not your coins.