Crypto exchanges have hit upon an absolute gold mine, bringing in millions of dollars every day in profit. Whilst Bitcoin’s late-2017 peak caused a surge of short-term traders to flood the market, it’s actually been the steady emergence of a more ‘sustainable’ marketplace that has caused exchanges to build their profits year upon year.
In this piece, we will explore how crypto exchanges make their money, which ones are making the most, where they are based and why. We will even tell you how to start your own cryptocurrency exchange!
How do cryptocurrency exchanges make money?
Let’s get down to brass tax. There are four ways that the common crypto exchange makes money from traders (in no particular order):
- Deposit fees
- Withdrawal fees
- Selling cryptocurrencies
- Buying cryptocurrencies
Deposit and withdrawal fees
Some exchanges charge extortionate fees, usually directly related to how convenient they are to use. For example, Coinbase charges 1.49% for crypto purchases or sales (3.99% if using a credit card) because they’re probably the easiest exchange to use, whereas Binance charges just 0.1% for the exact same service.
Traders who trade with large volumes of crypto and money can sometimes get discounts from the exchanges, who recognise that having one big trader on the platform with reduced fees is still more profitable than a bunch of small-time traders. The high volume traders are sometimes known as day traders, and they often trade huge amounts of money and cryptocurrency on the side of their full-time non-crypto job.
Buying and selling cryptocurrencies
Much like when you’re in the airport and the currency exchange counter offers abominable exchange rates to a captive audience, some crypto exchanges profit by doing the same thing. Each time a trader buys or sells a currency, the exchange takes a cut for themselves. Some more savvy or economical traders will ‘shop around’ for the best deals on crypto before moving their purchase into their trading platform of choices, though this could mean being registered with dozens of exchanges.
When it comes to Bitcoin, Ethereum, and the other well-known coins, it’s easy to shop around and find a good price, but what about the altcoins? Altcoins are the newbies, the up-and-comers, the emerging technology Blockchain ventures. They are a symbol of opportunity and capitalisation for traders in this space, but finding them is not always easy. When a new crypto-project is trying to get listed on exchanges, they have to start small with the more niche exchanges until they’ve built up enough of a buzz.
Crypto exchanges can make money selling trendy coins like Ripple, LiteCoin, and Monero all day long, but their capacity to make money on altcoins depends on their interest and infrastructure. Fortunately for the altcoins, most crypto exchanges know that their ability to keep their users is linked to how many useful altcoins they can list, and how well they can handle market rushes.
Some crypto exchanges are also in the habit of selling their own tokens, which is a great way of making further profits. One example of this is Binance’s BNB token, which has helped them to make more than a billion dollars.
It’s worth mentioning here that downtime is a monumental issue for exchanges. If you’re a trader and the platform you use keeps suffering downtime issues, you don’t have to think too hard about moving to another platform. If this downtime happens during a market rush, well, these crypto exchanges can wave bye-bye to a lot of valued customers. More money, more problems, more traders, more problems, more data, more problems, so the answer for the exchanges is to grow, invest in themselves and ensure they are constantly improving and developing their servers and service. If they can be consistent about this, there will always be traders knocking on their door and bolstering their profits.
How does a crypto exchange make money from listings and markets?
Above we’ve mentioned how they profit from customers, but crypto exchanges are often well-run business who find other opportunities to capitalise on the growth of the cryptosphere. Two of those methods are listings and markets.
Let’s start with listings. As we’ve mentioned, a crypto exchange can win customers by listing lots of altcoins and by being convenient to use. Now, they also have a level of quality and reputation to protect, so they don’t want to list tens of thousands of dubious coins on their platforms, they want to make sure they are listing viable and profitable technologies. Since a new cryptocurrency will often find it hard to get listed for free, they might need to give a lot of their token (or BTC) to the exchange to help them drive initial revenues, because simply being listed on a reputable exchange will bring them a lot of attention and interest. Listing fees on the top platforms can cost tens of thousands of dollars in BTC, but if the exchange backs the new technology, they might accept the native token in the hopes that it eventually becomes worth much more.
Markets or Market Making is another profitable business activity that differs slightly from buying and selling cryptocurrencies, and so is worth a brief explanation. Imagine you have a crypto exchange and you want to offer a market for BTC/BOB (Bitcoin, and the Boliviano currency from Bolivia). Nobody else is offering this pairing on their exchange and so you can open this market to traders there and dominate the region. In order for you and your exchange to do this, you need to set up an automated trade system that combines BTC/USD with USD/BOB, so that you have a BTC/BOB price feed. Once this has done, trading in Bolivia can commence and the market will become popular in that region (as long as it’s legal).
Some crypto exchanges are big fans of opening up this sort of international trade, with HitBTC being the major platform, offering 825 different market pairs. Binance has the third-most with 597.
How much money do crypto exchanges make?
The most recent data to answer this question comes from 2018, in which Binance was the top-earning crypto exchange, making $3.48m per day. The top 20 exchanges averaged about $1m per day in profits, however only the top six could actually claim to make more than a million bucks a day. These six were: Binance, Upbit, Huobi, Bittrex, Bitthumb, and Okex.
What we do know is that Binance has hit more than $1bn in cumulative profits. Upbit and Bitthumb, both from South Korea, have suffered a loss in profits, plummeting 70% and 63% respectively. Chinese-founded Huobi, which claims to be the fourth-biggest crypto exchange, processes over $1bn in trades per day and continues to grow; their profits are unknown but some argue that they are more profitable than Binance.
In 2020, the biggest earners so far are HCoin (China), Coinsbit (Estonia), BitForex (Singapore), and LBank (China).
What is vital to know is that there are hundreds of exchanges and some of them are trading billions of dollars worth of assets per day, which means huge commissions are coming in on a regular basis. Nobody really knows how much the exchanges make, but you can be assured that it’s a good slice of the overall pie.
Where are the world’s top exchanges located?
Japan, China, South Korea and Singapore are dominating the crypto exchange scene right now, with more than half of the world’s crypto trades going through Asia-based exchanges. Increased scrutiny into these exchanges is causing some serious anxiety in these markets as governments become more suspicious of malpractice. The lessening hospitality in Asia is forcing some exchanges to rethink their positions and instead move to places like Malta and Estonia. Many of these companies are registered in Seychelles in any case, due to its status as a tax haven and its friendliness towards cryptocurrencies.
Can you start your own crypto exchange?
If this article has you drooling over the prospect of adding several zeros to your bank account, perhaps you might want to consider starting an exchange of your own. It won’t be easy, but it’s not impossible.
It can be achieved in just ten steps:
- Get a team of relevant lawyers to pursue the correct licensing requirements
- Get funding from investors, or put in your own capital if you want maximum ownership
- Find a white label crypto-development company to build your exchange
- Make partnerships and connections with other exchanges
- Find a payment processor to handle your transactions
- Ensure your exchange is secure and reliable
- Beta test for bugs and vulnerabilities
- Start promoting your platform to potential users
- Build a customer service and accounts management team
- Work with your lawyers for ongoing issues
What’s important to consider when doing all of this is that there are many (really, loads) legal implications on the way, and international jurisdictions will come into play based on where your exchange is based, where the users are, what currencies are being traded and more. However, these legal hurdles can clearly be overcome judging by the sheer number of exchanges out there, so don’t let it put you off!