Have you been asking yourself how do crypto exchanges make money? If so, worry no more because, by the end of this article.
You will discover multiple ways that exchanges like Binance and Bybit crypto exchanges usually make money.
Trust me, this article will be beneficial and straightforward to give a quality answer to this question you have been asking yourself. Let’s get started.
Deposit fee
In every cryptocurrency exchange, it offers a wide range of different assets to its users.
Before you can purchase cryptocurrency like Bitcoin in any cryptocurrency exchange, you have to deposit some money into your wallet.
The method you can use to deposit is a cryptocurrency or Fiat currency.
If you are depositing money with cryptocurrency, it might be very cheap in terms of charges depending on your chosen crypto coin, for example, TRX.
But using Fiat currency to deposit, like bank transfers, will also be cheap.
Using debit card or credit card payments will incur a higher amount of charges.
The cryptocurrency exchange will pay the credit card company some money for processing the transaction.
However, deposit fees always vary from each other crypto exchange,
Some cryptocurrency exchanges charge as high as 11%, 3%, and 5% per transaction to deposit on the exchanges.
But at the same time, some other exchanges charge very little to deposit.
Trading fees
The trading fee is the amount of money you are being charged per trade you complete.
It costs a little bit more in most crypto exchanges. It’s about 0.1% fee,
For example, if you purchase bitcoin worth $100 in An Exchange, the charge of 0.1% is equivalent to 10 cents that you are going to be charged.
However, trading fees are always low, around 0.1% to 0.5% per trade.
It can accumulate over time, especially if you are one of the active Traders who buys and sells frequently on the crypto exchange.
And this generates a lot of profits for crypto exchanges like Binance, Bitmart, and XT to get billions of dollars in volumes daily.
Withdrawal fees
This process takes place whenever you want to withdraw your cryptocurrency from one exchange to another exchange,
or if you want to send the money to another person in the form of cryptocurrency, you will be charged a certain fee.
Before the exchange will send out the cryptocurrency to your second wallet or send it to the person you want to send it to.
Those fees can add up, especially for active traders consistently withdrawing assets from one exchange to the other.
Bitcoin and Ethereum networks justify fees by trying to help secure the network. At the same time, cryptocurrency exchanges are profiting from them.
For example, let’s assume you have 1 bitcoin (BTC) that you want to withdraw from your Bybit exchange to your metamask wallet.
Bybit will charge you a 0.0005 Bitcoin (BTC) network fee to complete the transaction.
When writing this article, the charge was around $13.80. If you do this multiple times, you will see how it accumulates and stacks up.
So whenever you get angry with the withdrawal fees,
just remember that this is how the exchange makes money
from your transactions.
Listing fees for new cryptocurrencies
Most cryptocurrency exchanges charge a massive fee for a new Coin or token before it can be listed or start trading on their exchange.
It depends on the exchange and the project that is to be listed.
The listing fees can run into millions of Dollars or thousands of Dollars.
For a project to be listed on a significant exchange, it has a huge exposure and shows the legitimacy of the cryptocurrency project.
Binance and Coinbase are centralized crypto exchanges, and they have millions of users,
Many projects are willing and ready to pay millions of dollars to access all their crypto’s potential buyers and sellers.
On the exchange.
This fee helps the crypto exchange afford the cost of integrating the new token into the exchange.
It will require some development to work correctly on the crypto exchange.
There is a compliance cost because the exchange has to vet any project that is about to be listed to reduce legal risks.
Crypto loans
Borrowing against your crypto assets is possible. The volatility in the crypto market is what makes it a risky option.
Cryptocurrency exchanges like Binance and Bybit make money by lending crypto to its traders.
They also earn interest and liquidation fees when their borrowers miss margin calls.
A crypto loan is one of the secured loans in which your crypto Holdings will be used as collateral for liquidity from a lender that you will pay back bit by bit until it is completed.
As long as you have made your payments and paid the loan amount ultimately, you can get back your crypto at the end of the loan duration.
Most times, your loan amount is a percentage of the value of the cryptocurrency you are using as collateral; this is also known as the loan-to-value ratio. (LTV).
Yield farming
Yield farming is entirely different from crypto staking. It allows cryptocurrency holders to (lock Up) their coins on the exchange to earn rewards.
The exchange provides this service by offering yield farming pools, which brings the lenders and borrowers together.
For example, if you fund your ETH on the Binance ETH 2.0 staking pool, The Binance exchange will lend out your ETH to earn interest.
They will give you some amount of the yield (received in the Binance ETH pool.
which is available and can be traded at a 1:1 ratio) depending on your pool share and reserve the remaining yield as their profit.
The yield percentage offered annually can be pretty juicy. It usually starts from 5% to 10% or higher (APY).
Yield farming has its risks, as other business models do.
If the crypto exchange gets hacked, the funds locked up in the pools can be lost.
So, it is crucial to research exchange security practices before putting your crypto into their yield pools.
Cross-promotion
Cross-promotion is a method which top cryptocurrency exchanges use to make gains.
This is running advertisements on their platform for another company to spread awareness.
Crypto giveaways like airdrops are typical examples of cross-promotion.
Airdrop is a marketing method coin owners use to partner with crypto exchanges to promote their coins.
The process includes sending free coins to users (wallet addresses).
The purpose of airdrop is to build awareness around the crypto community about new tokens or coins to gain more exposure.
Sometimes, the task required by the participants includes placing a trade or performing some transactions on the crypto exchange.
When this transaction is carried out, the cryptocurrency exchange will charge fees, and that’s how they make their profit.
Market making
The most common and straightforward way crypto exchanges make money is through market making.
The strategy requires the exchange to provide liquidity on a particular crypto coin.
Market maker provides Bids and offers (ask) prices on the crypto coin. They will make a profit from the difference.
Anyone can operate as a market maker, Whether A centralized crypto exchange or an individual.
The profit from market-making relies on the bid-ask spread price difference over multiple trades.
Apart from the differences, market makers sometimes make trades for their accounts, known as the (Principal trades).
Conclusion
Since you have read until the end, I am 100% convinced that you have been able to understand how cryptocurrency exchanges usually make money.
There are other ways cryptocurrency exchanges make money, which I will also add as a bonus.
ICO, IDO, and launchpads are other ways the cryptocurrency exchanges use to make money from new projects.
Remember to click here to learn more about other things regarding cryptocurrency, which I have covered in my previous articles.