Cryptocurrency Exchange Fees Explained
Once you are an active market participant, fees will be paid. However, it is essential to avoid paying unnecessary or excessive fees. Find out how in this article.
Have you ever looked at the currency in your wallet and wondered: “How can I make more?” If so, then you would have probably been told to work hard, save and invest in the stock market over the long term. This approach is excellent, but it lacks one thing - details. Details about how the financial system works, who makes profits, and how to manage your risk to maximize your earnings. This obscurity helps only the incumbent financial giants, but in comes the decentralized money and currency.
Decentralized monetary space
Within the decentralized monetary space, all the information you need to make adequately informed decisions is there; all you need is to know where and how to look. To ensure trust and facilitate trade, some central entity must manage issuance and control of the currency. Once money or currency is created, there is a fee to be paid. This is given to the parties involved in the creation process.
For instance, governments collect seigniorage from banks who need currency to operate. Banks, in turn, charge customers fees for any services provided; ATM or point of sale transactions work in much the same way.
Within the digital asset space, fees are built into the system. This is to incentivize entities to dedicate their resources to maintaining the system. Since cryptocurrencies are not a public good, they do not get broad government support. Moreover, they are not supported by banks. Ultimately, decentralization is paramount, and this is where fees come in; they help ensure this happens.
Whether trading peer to peer or via an exchange, each factor deserves a fair amount of attention within its right. Both aspects contribute to choosing the best and cheapest cryptocurrency exchanges for you.
Types of Fees
Trading brings with it several different types of fees across the board, which will be explored hereunder:
Maker / Taker Fees
Liquidity allows for trades in markets to be settled in real-time; once reliable, orders will flow, and the market will move in a relatively efficient manner. Markets are made up of makers and takers whose actions can either provide or remove liquidity. The maker and taker fees are based on who provides liquidity versus who takes liquidity. The maker adds liquidity by making an order and depositing assets to the open market. The taker takes liquidity from the market by filling the order and locking those assets away.
Maker fees are typically lower because makers add orders that can be filled in the future once the proper conditions are met. For example, if one sells Bitcoin when the price is at $64,000, by adding to the market's future, trading is ensured for a future date based on the order book.
On the other hand, Takers take orders from the order book and thus remove liquidity from the market. The average fees seen here are 0.2% maker and 0.25% taker.
Deposit / Withdrawal Fee
Depositing assets on an exchange place them in a high-risk position. Said risk can come in the form of paying customers due to a hack or leak. Therefore, for taking on this risk, some exchanges charge a deposit fee for hosting assets.
At this stage in the crypto game, to encourage mass adaption, many more users are needed. The trend is to make this cost zero for cryptocurrencies and digital assets to encourage more users to the platform and make the experience more customer-friendly.
Government currency/ fiat has a different set of rules due to being centralized and backed by enforceable law. To deposit fiat is 4% of the deposit amount, and the following currencies are typically hosted: USD, EUR, GBP, and RUB. Withdrawals are 3%, plus up to $25 depending on the total amount being withdrawn.
In all cases, the gas fees for the blockchain being used must be paid. This changes daily, depending on the protocol implemented. For example, as of March 24, 2021, transactions on BTC cost $15-$21 on average. The cost to transact on ETH is currently 163.88 Gwei.
Factors affecting fee structure
The main factors impacting fees are volume and time. Platforms typically track activity for a rolling 30-day window. For active traders, as their volume increases, costs are lowered. But, to the non-seasonal trader, and because trading is practiced either without prior experience or a flawed strategy in place, it will prove more expensive to engage regularly.
How to avoid fees
Once you are an active market participant, fees will be paid. However, it is essential to avoid paying unnecessary or excessive fees. To avoid these pitfalls, a plan is needed before every trade. Thus a solid trading strategy will come in handy. Keeping in mind, the following tips will go a long way and will help build a foolproof system in the long run:
Buying on limit order as opposed to market order– this will ensure lower fees since you are contributing to filing the order book;
Limiting trades – the more active you are, the more fees per trade;
Use exchange tokens where possible to lower trading fees;
Use a single exchange as your point of entry and exit for both fiat and digital assets – since transferring assets between wallets incur gas fees.
Things to consider when trading on an exchange
Centralized exchanges typically have a native token that plugs well into the exchange’s ecosystem. Using a platform’s native token lowers fees, and for the majority of the time, if their native token is used, a discount is applied.
One must choose the exchange with the lowest fees based on trading goal and style. Not all countries are served due to sanctions. Therefore, combining DEX and CEX exchanges to trade into or out of positions is the best option. The withdrawal minimums must be considered before depositing any asset.
Unfortunately, many scams, exits, and other schemes are rampant within the realm of cryptocurrency, so caution is advised. Each user must choose the exchange that has the best reputation, highest security, and user interface to protect one’s assets.
The best approach is a buy-and-hold strategy to minimize the fees seen. Each entry and exit point must be well thought out and in line with your short, medium, or long-term plan. It is more profitable to buy and hold over the long term (which generally exceeds a 2 to 3-year period).
Which cryptocurrency has the cheapest fees
Currently, the cryptocurrency with the cheapest standalone fees is those with their ecosystems, such as Binance and their bright chain, where transactions can cost as little as $0.01.
In the end, fees measure value, so if one is looking for digital assets with the best value for long-term holding and storage, Bitcoin remains your safest bet.