How do Crypto Exchanges Make Money?

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By Keyur Khamar

May 11th, 2020

The last decade has seen cryptocurrency exchanges sprouting up all over the globe. While still in nascency, these exchanges have contributed to billions of dollars in trading volume. As a result, entrepreneurs far and wide are jumping on the financial opportunities presented by these exchanges. The revenue model of cryptocurrency exchanges has therefore intrigued everyone - from C-level executive to a startup founder. With people dwelling on the benefits offered by these exchanges, there has been an increasing need to understand the business model of these cryptocurrency exchanges. What exactly is the revenue model of cryptocurrency exchanges? How do these digital exchanges make money? In this article, we’ll look at some business model of a few cryptocurrency exchange that broadly make the revenue models of cryptocurrency exchange. There are broadly four ways to monetization:

Listing Fees on Cryptocurrency Exchanges

Cryptocurrency exchanges that have recently been incepted inevitably struggle with minimal volume - especially during the early stages. It is unrealistic for these exchanges to rely solely on commissions (which is the best way for monetization, up next). So, to curb that problem, these digital exchanges can introduce a coin and token listing service to fuel initial revenues. Initial Exchange Offerings (IEOs), Security Token Offerings (STOs), and Initial Coin Offerings (ICOs) can be organized to collect a portion of funds raised which in itself can be to the tune of hundreds of thousands of US dollars, depending on the project. These listing fees are typically payable in cryptocurrency or the project’s native tokens, and listing prices can be in the range of 1 to 10 bitcoin currency. While there have been exchanges with incredibly low volumes that have managed to produce billions of dollars for their founders in the form of listing fees, it should be noted that competition for token and coin listing has become fierce. In fact, competition among exchanges to list high-potential coins and tokens has become so cut-throat that many exchanges have adopted to “wash trading”, a practice in which exchanges artificially increase their reported volumes so as to rank higher on websites like CoinMarketCap. It goes without saying that this is an unethical business practice and should be avoided at all costs.

Commissions involved in running a Crypto Exchange

Perhaps the most well-known revenue model of cryptocurrency exchanges (and even other, physical exchanges) is to charge commissions on trades. This commission is effectively a fee for the service of facilitating trade between the buyer and seller. In digital asset exchanges, commissions of as low as 0.01% have become commonplace. Goes without saying, such low commissions allow for larger trading volumes. For instance, trading volume as large as $1,000,00 USD would require a mere $100 in commissions. As a result, if an exchange can attract larger volumes, it becomes all the more profitable. As the cryptocurrency market matures and expands, we can expect that digital asset exchanges will enjoy increasingly large volumes and thus commission revenues.

Crypto Exchanges and their Market-Making

Another good revenue model of cryptocurrency exchanges includes market-making. In simple terms, this means producing liquidity for a given financial instrument. In its simplest form, market-making consists of buying and selling a digital asset on your own exchange, at slightly less desirable prices than on another exchange. Once the trade is done, you place it on a different exchange - in order to offset your previous trade. This technique does well if automated and applied to largely spread markets.

Fund Collection for IEOs, STOs, and ICOs

Another business model for finance in cryptocurrency exchanges is to equip the platform with an IEO module, allowing other companies to organize token sales. In this revenue model of cryptocurrency exchange, your exchange serves as a repository for people to buy tokens before they go to an exchange—kind of like how Kickstarter works. In this case, however, contributors receive tokens in exchange for other digital assets such as BTC or ETH. So, how does the exchange make money in this process? When the exchange collects funds on behalf of the fundraising company, it charges a percentage of total proceeds as a fee. Depending on the final amount raised, such a percentage could yield a large payout for the hosting exchange.

In conclusion

Evidently, there are not one but many ways to establish a revenue model of your cryptocurrency exchanges. Depending on your current and future goals, and your expectations out of the exchanges, you can opt for one of the listed ways. This list, in most likelihood, will keep evolving as more researches are undertaken in the field of cryptocurrencies and exchanges - and more doors of opportunities will open!

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Frequently Asked Questions

What are the main revenue streams for cryptocurrency exchanges?

Crypto exchanges generally make money via transaction fees, which are small charges applied when customers purchase, sell, or trade cryptocurrencies. Other revenue streams include withdrawal fees, deposit fees, listing fees for new tokens, and spreads, which drive fluctuating prices. Exchanges may additionally benefit from margin trading interest, loan services, staking options, and premium account subscriptions that provide additional features and benefits.

How do transaction fees work on cryptocurrency exchanges?

When a user trades cryptocurrency on an exchange, transaction fees are charged, which are often a percentage of the transaction amount. These costs vary by exchange and can vary between makers (who increase liquidity) and takers (who remove liquidity). Fees can range from 0.1% to 1%, with higher trading volumes frequently qualifying for lower rates, which promote regular and larger deals.

Are crypto exchanges charging for deposits and withdrawals of funds?

Yes, most cryptocurrency exchanges charge fees for deposits and withdrawals. While deposit fees for bank transfers are frequently lowered or removed, they can be higher for credit card deposits. Withdrawal fees vary for each cryptocurrency, as each has its own network fees. Exchanges can additionally charge additional fees to cover transaction processing costs, especially if the withdrawal volume is large or above specific limits.

How do crypto exchanges earn from staking services?

Some cryptocurrency exchanges provide staking services, allowing users to earn rewards for keeping particular cryptocurrencies. Exchanges serve as mediators, mixing user cash to engage in staking and earning rewards.They usually charge a percentage of these rewards as a fee before delivering the remaining amount to users. This fee structure benefits users wanting passive income while allowing exchanges to profit from staking operations.

Are cryptocurrency exchanges earning from their own tokens?

Yes, multiple cryptocurrency exchanges create their own tokens (e.g., Binance Coin, FTX Token) and gain profit by providing trade discounts or staking opportunities for these tokens. Token demand might increase as a result of these rewards, increasing the token's value and benefiting the exchange's financial sheet. Exchanges can also raise funds by initially trading their tokens, leading to a capital inflow and another form of profit.

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