How Cryptocurrency Exchanges Make Money
With several projects making million from ICOs those who are business oriented are probably already thinking of ways to launch their own project. Interestingly, launching a crypto exchange is one of the top ventures that come to mind.
With several projects making million from ICOs those who are business-oriented are probably already thinking of ways to launch their project. Interestingly, launching a crypto exchange is one of the top ventures that come to mind.
When you think of it, crypto exchanges can never really go out of business as long as the crypto space exists. Whether the market is bearish or bullish, they make money from traders. This makes them a perfect company.
Crypto exchanges became popular about two years ago. Since then, many of them have been launched while many are dead and gone. The mainstream adoption and coverage of the entire crypto industry are currently enjoying can be credited to crypto exchanges. This is mainly because they make buying and selling coins easy and straightforward. Without them, you and I would probably have to learn some basics programming skills. They made it possible for a total newbie in the crypto space to own coins within a few minutes.
Crypto Exchanges Are Prone to Hack
Although a significant part of the crypto industry, exchanges are also one of the industry's significant weaknesses. This is simply because they are prone to hack attacks. So far, more than $2 billion has been recorded stolen from crypto exchanges globally. This makes one start to wonder if these exchanges know one or two things about these hacking attempts. There has been speculation that some of these exchanges hacks are from the inside. Meaning someone in charge must have formed some arrangements with hackers to sabotage the platform's security.
Decentralized Cryptocurrency Exchanges
This is what led to the development of decentralized crypto exchanges. DEXes are popularly called don't keep or store user's funds for them. Funds are usually held in the user's wallet, and trades are made directly from the trader's wallet. However, the best way to ensure the security of funds while trading and speed, DEXs are not so popular. The low popularity is mainly because DEXs present a little avenue for their owners to earn money.
Since most crypto exchanges are centralized (i.e., they are private), their activities are not exposed.
Whether you want to believe it or not, no one is really in the game of cryptocurrency just for the fun of it. Money is always the primary motivation. Everything else is second to that. This is why DEXs are not being pushed like centralized exchanges. Most DEXs are usually run as a side project by already established crypto projects. Or better still, they have another avenue of bringing money that is not limited to just the exchange.
There are many ways to make money from centralized exchanges without having to steal users' money. We will be discussing some of these methods in this piece. Importantly, just because there is money to be made from setting up a crypto exchange, it doesn't mean it is the right thing for you. There are 100s of exchanges globally still struggling for volume, so without adequate funding (in 100s of millions ), your exchange is likely to tank. (Sorry to tank your dream).
For those who want to know how their favorite exchange makes money and manage to stay in business, here you go:
How Crypto Exchanges Make Money
Spread is the difference in the price the exchange is willing to let you buy or sell a coin and the actual market price. So this is why whenever you enter a trade, especially if it is a margined trade, you will automatically have a negative trade balance. So the market needs to move in your trade direction before you can register a profit. Spread trading is popular among CFDs exchanges as well as exchanges that offer leverage on trades.
Withdrawal And Deposits Fees
Depending on the exchange you are trading on, you will be charged a deposit or withdrawal fee. This fee is usually a small percentage of the amount you are depositing or withdrawing. This amount is typically negligible, but considering that these exchanges are taking the price from many accounts daily, it adds up.
Commission on trade
For some exchange, instead of spread, they take communion off every trade you make. Some take both spread and commission! So it all boils down to how greedy your exchange of choice is.
Over-the-counter (OTC) deals
Over-the-counter deals are not automated and, most time, usually involve a large amount of money changing hands. The more significant the amount, the higher the transaction fees to be made. Some exchanges focus solely on OTC trading deals alone simply because of how profitable it is.
On top exchange such as Binance, coin listing is rumored to cost upwards of $100,000. Imagine listing just 100 coins! Although not all deals charge such an excessive amount for coin listing, considering that there are many coins to detail, there is a lot of money to be made.
Exchanges are known to pull in a lot of traffic, especially the popular ones. This makes them the perfect advertisement board for a crypto-related project. The traffic to crypto exchanges is target-specific as it is almost impossible to visit an exchange URL without having some interest in cryptocurrency. Some exchanges now promote coins and projects on their homepage in exchange for money.
Some projects prefer to capitalize on the influence an established exchange already has to promote their coin. This partnership does not usually come cheap. Either the project is paying upfront or later with its native token, or the exchange owns a part of the founder's cut. Either way, the exchange gets to cash out big. These are some of the "legitimate" ways brokers make money for you and me. There are cases whereby exchanges open, losing trades on the trader's behalf. Some broker reportedly fills the order at a wrong rate at times. The good news is that this type of exchange generally doesn't survive long and can be detected with a simple review search. So stay sharp and be careful out there.