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Cryptocurrency exchange guide
How do crypto exchanges make money?

Guide contents

How do crypto exchanges make money?

Quick take:

  • Crypto exchanges have multiple options to make money
  • Fees charged on every trade form a key revenue stream
  • Being so connected to different currencies allows exchanges to buy currencies and sell them for a profit at scale

How do cryptocurrency exchanges make money?

Crypto exchanges have quickly become behemoth in size.  

We're talking multi-billion dollar companies that process trillions of dollars in transactions across the year. And they do this whether the market is good or not. 

Centralized or decentralized, a lot of people are using these brands to help them trade crypto. 

The question is, how are they managing to make money and stay solvent?

Let's look into it.  

Trade commissions

Cryptocurrency exchanges make money primarily through trading commissions on transactions made by exchange users.

When a trade is executed, the exchange takes a commission from both sides of the transaction, typically 0.1% of the order value (you can see full commissions and fees in our reviews of the best crypto exchanges).

However, if an order is sent for external execution, then only one side of the transaction will be charged a commission.

In order for an exchange to generate trading commissions and bring profit to its owner, it must create conditions for active trading.

This requires a sufficient number of active users, which can be stimulated through market makers and trading bots.

Listing fees

Listing a cryptocurrency on a major exchange is an important step for any crypto project.

It provides access to investors and liquidity, as well as the potential for prices to skyrocket.

However, it's not something a lot of projects can achieve for free, and it can be pretty expensive to get listed on the big players in the market. 

Large exchanges can charge between $2 million and $5 million to list a cryptocurrency, though Ethereum's co-founder has accused some of charging up to $10-15 million.

The exact price tag depends on the individual project and the services they need in order to get listed, which can include marketing promotion and technical expertise.

Listing fees are often worth it for projects that want to gain more exposure and increase their value, but it's important for them to weigh up the cost versus the potential benefits before making a decision.

Over the counter processes

Over-the-Counter (OTC) trading is a process that allows institutional investors to buy and sell large amounts of cryptocurrencies without having to go through the public exchanges.

This type of trading is becoming increasingly popular among institutional investors, asset managers, and miners who need to find buyers for large lots of mined cryptocurrency.

OTC trading provides more customized and confidential services than traditional exchanges, allowing these participants to place orders worth millions of dollars without affecting the course of trading.

The demand for OTC trading has grown significantly in recent years as it provides a secure platform for large players to make transactions without going public.

It also helps protect the market from being manipulated by big orders that can push up or down the price of a cryptocurrency.

As such, OTC trading has become an important source of revenue for crypto exchanges as they are able to provide specialized services tailored to the needs of their clients.

Markups

Markups provide high-quality liquidity and uninterrupted order execution on cryptocurrencies.

They're added to all prices that come into the market depth from external suppliers within the brokerage model, allowing for automated processes such as arbitrage.

This is especially useful in cases where bid prices exceed ask prices, which is highly likely to occur when two or more liquidity suppliers are involved in the aggregation.

To prevent customer confusion, platform operators can use markup filters built into the aggregator to eliminate these arbitrage situations automatically. This ensures that customers receive accurate pricing information and a smooth trading experience.

Markups also help ensure that orders are executed quickly and efficiently, without any delays or disruptions.

By providing reliable liquidity and order execution, markups help create a secure environment for traders to make their transactions with confidence.

Furthermore, they can be used to protect against market volatility by setting limits on how much of a price difference can be accepted before an order is rejected or cancelled.

All of these features make markups an essential tool for cryptocurrency trading platforms looking to provide their customers with the best possible service.

Market making

Market making involves buying and selling digital assets on the exchange at slightly higher prices than on other stock exchanges.

This technique works best when automated and used in long-distance markets, as it allows the exchange to make a profit from the difference between the bid price and the ask price. This is, reportedly, how Sam Bankman-Fried made a lot of money to help launch FTX.  

Market making helps create liquidity in an otherwise illiquid market, allowing traders to buy and sell with ease.

The process of market making is relatively simple. An exchange will buy an asset at one price and then immediately sell it at another price, usually slightly higher than what they bought it for.

This creates a spread that can be used to generate profits for the exchange.

The more trades that are made, the more money an exchange can make from this process.

Market makers also help reduce volatility by providing liquidity to both buyers and sellers in times of high demand or low supply.

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