News, Culture & Society

How do crypto exchanges make money?

With many cryptocurrency exchanges charging only 0.1% for exchange fees, you may wonder how it is that these projects make money. But the answer is simple; in 2021, over $60 billion worth of Bitcoin was exchanged, and 0.1% of over $60 billion is $60 million.

Granted, this number is divided amongst 100s of different exchanges. And, this number only accounts for the Bitcoin sold this year on all of the combined exchanges. However, the fact remains that a site like Cryptoexchange can be a very lucrative project when it is managed well.

What Are Users Paying for?

Although Bitcoin was designed to eliminate middlemen, like banks and governments, crypto exchanges have become incredibly valuable projects. Essentially, this is because for-profit exchanges bring more buyers and sellers together in a similar way that traditional market exchanges do.

In 2008, when Bitcoin was created, the digital currency was mined and exchanged on home computers, much like sending an email cash transfer. Bitcoin was designed to replace cash and remove borders, allowing traders to interact peer-to-peer with a secure and forgery-proof digital currency.

Much has changed. Presently, more Bitcoin is held than is exchanged for goods or services, and this has only increased its market value.

As is the case with any valuable asset, in order for it to be made liquid or to sell to invest in it, you need a marketplace. This is exactly what cryptocurrency exchanges are. And they offer countless and propriety services for investors. To access these services, there are fees, much like any bookkeeper or brokerage service.

What are the costs of running an exchange?

While Bitcoin’s trading volume may be outstanding, to develop and operate a platform there are many costs.

Platforms need to be completely secure because they are taking and storing money and digital assets. Blockchain technology is key to the success of many of these projects. Blockchain uses encryption that is close to impossible to hack. Maintaining the security of the digital system is central and costly.

Exchanges also need to develop a platform that is user-friendly so that it invites new users. That means offering customer service, and many exchanges currently employ real people to help make the platform more inviting.

Top Exchanges and Trading Volume

While many exchanges will offer similar services, the key to running a lucrative exchange is trading volume. The higher the volume of cryptocurrency that is moved on the exchange, the more than the 0.1% commission becomes a profitable margin. And for top crypto exchanges, this means very they have high-profit margins.

Consider the following top-tier exchanges. Here is a snapshot of the value of their trading volume for 2021 alone, USD:

  • Binance: $25,550,946,753
  • CoinBase: $2,685,459,952
  • Kraken: $1,413,808,704

Exchanges also earn income from listing fees from cryptocurrencies. Exchanges like Binance and Kraken, which move the highest volume, can charge anywhere from $100,000 and more for companies to list their cryptocurrency on top exchanges.

Digital Finances

Cryptocurrency exchanges similarly earn money to traditional banks, investment groups, and hedge funds. Not only do exchanges offer services and easy access to cryptocurrencies, but they also earn from holding cryptocurrencies. Because these projects are dealing with large amounts of money, they can invest in other lucrative projects, leveraging what the exchange itself has in order to earn more.

Finally, exchanges do not have the same expenses as traditional banks as nearly all of their operations are run automatically and digitally. Because they are not paying for expensive infrastructure, their profit margins are higher, which is why commissions are quite low.

And because major platforms have a global reach, crypto exchanges essentially have unlimited access to potential customers.

Reputation and Security

However, the success of all of these platforms relies on the necessity of reputation and security. Exchanges need to offer completely secure processes, as they are taking and managing people’s money. As such, building and maintaining a technologically robust is central to their success. That means a security breach or hack could be the end of a formally reputable exchange.