December 10, 2023
There are hundreds of digital currencies on the market making it simple for people to buy and sell digital assets of all types. Crypto exchanges are the organizations that facilitate these transactions.
As the crypto market continues to grow, so will the need for more cryptocurrency exchanges. But how do crypto exchanges make money? Is starting a crypto exchange a profitable venture? The guide below explores the details.
1. Trading Fees
Trading fees are the most common source of revenue for crypto exchanges. These transaction fees are simply the costs of doing business on an exchange. Trading fees are essential for crypto exchanges to operate.
In this sense, they also make it possible for centralized exchanges (CEX) to deliver a seamless trading experience for their users. Trading fees are usually tacked on to both fiat-crypto trades and crypto-crypto trades.
The exact amount will vary based on the specific exchange you’re using. For example, Kraken charges maker and taker fees based on a user’s trading volume.
We’ll discuss the different types of trading fees below.
Types of Trading Fees
The most common types of trading fees are:
- Maker and taker fees: Makers create liquidity in a crypto market by adding orders for traders to take. Orders incur a maker fee if they’re not immediately matched. Takers remove orders that are filled immediately and are charged a takers fee.
- Deposit and withdrawal fees: Deposit fees are charges toward users for funding their accounts. Withdrawal fees are charged to users when they send their money to their crypto wallets. Deposit fees are less common than withdrawal fees since most exchanges want to incentivize people to deposit funds.
- Interest: Crypto exchanges that offer margin trading will charge interest to give you the funds to begin trading on their platform.
- Borrowing fees: Margin trading can only accrue borrowing fees on top of your interest rate.
- Liquidation fees: If traders don’t close their positions in a timely manner, the exchange will automatically liquidate it and charge a liquidation fee.
2. Listing Fees
The goal of a new cryptocurrency project is to generate awareness and buy-in from an intrigued crypto market. One of the ways projects can accomplish this goal is by adding their tokens to a cryptocurrency exchange.
Cryptocurrency exchanges will charge listing fees to crypto projects to enhance their visibility. You may be wondering why crypto projects would be willing to pay listing fees for a feature. The answer is simple.
Popular cryptocurrency exchanges draw worldwide audiences and can offer new cryptocurrency projects the exposure they need to get off the ground. For example, Litecoin, one of the world’s first popular altcoins, debuted at a $4.30 or 0.031 BTC valuation in 2013.
Since then, the altcoin has maintained substantial growth and even influenced Bitcoin with the implementation of Segwit. It wouldn’t be a stretch to say that Litecoin’s current valuation is owed to the popularity of its listing more than a decade ago.
3. Margin Trading and Leverage
Margin trading refers to the act of using borrowed funds to trade an asset. Crypto exchange platforms offer margin trading to generate revenue and attract new users.
Some decentralized exchanges (DEX) provide margin trading opportunities with reasonable interest rates to encourage more sign-ups. Of course, there are significant risks to engaging in margin trading. If your trade goes upside down, you could risk paying higher interest and liquidation fees.
Margin trading isn’t the only debt financing strategy crypto exchanges use to drive revenue. They may also engage in leverage trading. Leverage trading is the process of borrowing money to finance a crypto project.
Crypto exchanges can rely on leverage trading to:
- Boost their returns via future accounts, margins, and options
- Finance assets to expand their operations and business scope
- Increase their equity valuations
As you can see, leverage can not only generate revenue for crypto exchanges but can also influence their trading strategies as well.
4. Staking Services
Staking is a way of earning rewards by holding on to specific cryptocurrencies. Through a consensus mechanism known as “proof of stake,” users can generate rewards by making their cryptocurrencies work instead of collecting dust in their wallets.
Generally speaking, you’re agreeing to pledge part of your crypto holdings to help the blockchain network better process transactions.
Crypto staking presents a win-win situation for all parties. By staking a percentage of your funds, you can make passive income from your assets, as well as make a blockchain less susceptible to attacks and improve its processing speed for legitimate transactions.
The crypto exchange, on the other hand, will profit by charging a fee on top of the rewards derived from the delegated coins. They may also take a percentage of your staking rewards.
5. Initial Exchange Offerings (IEOs) and Launchpads
Generally, you can purchase crypto when it’s first released during the initial coin offering (ICO). However, many investors are reluctant to take this route due to the potential of fraud and risk of low credibility.
After all, ICOs aren’t heavily vetted, and anyone can attempt to raise capital under this guise to fool investors and manipulate the crypto market.
Crypto exchanges have provided a solution through initial exchange offerings (IEO). These work similarly to ICOs, but they’re managed over a reputable crypto exchange. This lowers risk and ensures that investors are building capital towards a legitimate project.
Crypto exchanges pose stringent rules and regulations for IEOs. As such, they also dictate fees for new crypto projects. IEOs offer tremendous profitability for crypto exchanges.
6. Cryptocurrency Lending and Borrowing
In addition, cryptocurrency exchanges can increase profits through lending and borrowing services. Cryptocurrency lending is a decentralized finance (DeFi) service that permits investors to lend their holdings to buyers.
Crypto exchanges act as intermediaries between lenders and borrowers, ensuring a smooth process. In return, the exchange will charge fees or take a percentage of the interest accumulated by lenders. Adding this option is just one way exchanges can provide a service to the broader crypto marketplace and increase their profits.
7. Affiliate Programs and Partnerships
Finally, affiliate programs can provide exchanges with a long-term revenue model. Essentially, these exchanges work with bloggers, influencers, content creators, and financial institutions to raise awareness and increase sign-ups.
In doing so, the exchange will pay their partners an agreed-upon rate any time they receive a sign-up. This kind of arrangement is called affiliate marketing, and it’s one of the most effective ways online businesses generate income from influencers.
Within affiliate marketing, trading platforms can collaborate with other businesses in the crypto ecosystem to drive revenue. For example, let’s say that an exchange wants to increase its sign-ups by 100% by the next quarter.
With affiliate marketing, they can partner with well-known crypto news websites and promote their services. Every time someone clicks from the website to the exchange and signs up, the affiliate partner will make a commission.
This is a win-win situation for both parties involved.
Additional Revenue Streams for Crypto Exchange Apps
The revenue sources listed above aren’t the only ways cryptocurrency exchanges make money. Below are some additional revenue streams for crypto exchanges:
- Over-the-counter trading: Crypto exchanges charge fees for OTC trading, which allows buyers and sellers to quietly move large sums without disrupting markets.
- Blockchain rewards: Miners can earn blockchain rewards for mining a block of any cryptocurrency. For example, a miner can receive a number of Bitcoins (BTC) or Ethereum (ETH) for their work. Exchanges can take a percentage of these rewards or charge a fee.
- Custodial fees: These refer to the costs assessed by exchanges for safeguarding your crypto assets.
The crypto industry is an ever-evolving landscape, presenting exchanges with creative ways to both profit and deliver exceptional services to their users.
Is Running a Crypto Exchange Profitable?
Running a crypto exchange can be a profitable venture. However, your profitability will come down to your business model, unique value proposition, and user base.
For example, Coinbase generates substantial revenue from both consumers and financial institutions every year, in addition to stablecoin and blockchain rewards revenue. As a result, in the third fiscal quarter of 2023, they reported $674.1 million in total revenue.
Power Your Crypto Exchange With AlphaPoint and Maximize Your Profits
Crypto exchanges offer opportunities for strategic revenue streams that can potentially generate a substantial profit. As the crypto industry becomes more sophisticated, the options for monetizing your exchange with advanced features and capabilities will become virtually endless.
If you want to give your crypto exchange a boost with cutting-edge white-label services, AlphaPoint can help. To learn more about our crypto services, request a demo today.
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