You have probably heard about ‘cryptocurrency exchanges’ at some point in your life, but you do not know what a cryptocurrency exchange is, well, the simplest definition of a cryptocurrency exchange is digital marketplaces where you can buy and trade crypto. However, for you to properly understand what a cryptocurrency exchange is, there is need for us to properly define what cryptocurrency is.
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What is a cryptocurrency?
Cryptocurrency is any form of currency that exists digitally or virtually and uses cryptography to secure transactions, cryptocurrency is sometimes referred to as crypto-currency or crypto in some circles. Cryptocurrencies don’t have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units. What makes cryptocurrency different to other digital payment systems is that it doesn’t rely on banks to verify transactions, it is actually a peer-to-peer system that can enable anyone anywhere to send and receive payments. To date, there are thousands of cryptocurrencies including Bitcoin, Ethereum, Bitcoin Cash and Litecoin.
Issues have been raised concerning how secure cryptocurrencies are, well, cryptocurrencies are actually secure because all transactions are vetted by a technology called a blockchain, which is similar to a bank’s balance sheet or ledger. Each currency has its own blockchain, which is an ongoing, constantly re-verified record of every single transaction ever made using that currency. In order for you to buy or sell cryptocurrency, there is need for you to use a cryptocurrency exchange.
What is a cryptocurrency exchange?
Cryptocurrency exchanges are where traders can buy, sell, and convert different cryptocurrencies. They are necessary for cryptocurrencies to be traded at the scale they are today. Some exchanges offer the most competitive prices or speeds, whereas others provide specialized financial products. There are plenty cryptocurrency exchange companies around including Coinbase, Paxful, Quidax, Changely amongst others.
Cryptocurrency exchanges reflect current market prices of the cryptocurrencies they offer. You can also convert cryptocurrencies back into a Fiat currency on an exchange, to leave as cash within your account (if you want to trade back into crypto later) or withdraw to your regular bank account. On common cryptocurrency exchanges, ZAR1000 can be exchanged for bitcoin of equivalent value, and vice-versa. Similarly, bitcoin worth ZAR1000 can be exchanged for Ethereum of equivalent value. The same concept can be applied to different assets based on what is offered by the exchange. There are two types of cryptocurrency exchanges namely centralised and decentralised exchanges.
Centralized Cryptocurrency Exchanges
A centralized cryptocurrency exchange acts as a third-party between a buyer and a seller. Centralized exchanges are organizations that coordinate cryptocurrency trading on a large scale, using a similar business model to traditional asset exchanges like stock exchanges. Since these type of exchanges are operated and controlled by a company, they actually offer more reliability and hence centralised exchanges are the most popular exchanges as most crypto transactions go through centralized exchanges.
Decentralized Cryptocurrency Exchanges
Decentralized cryptocurrency exchanges (DEX) allow users to execute peer-to-peer transactions without the need for a third party or an intermediary. Decentralized crypto exchanges are blockchain-based apps that coordinate large-scale trading of crypto assets between many users. They do that entirely through automated algorithms, instead of the conventional approach of acting as financial intermediary between buyers and sellers. Please note that decentralized exchanges do not facilitate the trading of fiat currencies for cryptocurrencies. Want to bet on sports with Crypto? Try Sportsbet.io
Crypto Currency Fees
According to estimates compiled by Bloomberg, there are some Cryptocurrency Exchanges which generate as much $3 million in FEES a day, or heading for more than $1 billion per year, if you were wondering how Crypto Exchanges make money, there is your answer. Of course these are not the exact numbers, it shows the boom in virtual currencies is generating huge amounts of revenue. Some of the exchanges which handle large volumes of trading are Tokyo-based Binance and Hong Kong-based OKEx, they can process transactions equaling about $1.7 billion daily, considering that they charge fees of 0.2% and 0.07% respectively, you can actually see that they are making ridiculous amounts of money on a daily basis. It is against this background that you can actually notice that Crypto Exchanges make their money through these fees they charge and this article seeks to outline the fees which are typically charged by Crypto Exchanges.
What are crypto fees?
Crypto fees are essentially processing fees built into the networks that maintain bitcoin and other cryptocurrencies. In addition, third-party services like exchanges, trading apps and ATMs charge their own fees.
What fees do crypto currency exchanges typically charge
Before embarking on a cryptocurrency journey with a Crypto Exchange, you must be well equiped with the information on how the exchange works, including the fees you will be charged by the exchange as this will help you in deciding the exchange to trade with. In cryptocurrency trading, investors will have to pay fees when they perfom various tasks including making a deposit, trading, or withdraw money, please note that these fees are not universal but each and every exchange has its own fees structure. You need to be very careful when it comes to the issue of fees because they can seriously eating into your profits and nobody wants that to happen. Below is a list of the fees you will be charged by the crypto exchanges:
- Deposit Fees
Crypto exchanges provide several ways of depositing funds into your wallet and some of the deposit methods include mobile money transfer, bank transfer, credit or debit card deposits, PayPal transfers etc. It is important to note that each of these deposit methods charge you for the transaction, with the exception of a bank transfer where you MAY transfer for FREE. Credit or Debit cards and PayPal transactions will see you incuring from 2% to 5% and 2.5% in fees respectively. If you wish to buy your cryptocurrency directly, you will have to pay both a deposit fee and a trading fee.
- Withdrawal Fees
If for some reason or the other, you need to withdraw your funds, you can easily do so but plaese note that the exchanges normally charges you withdrawal fees. There are some Crypto Exchanges like Kraken, Gemini, or FTX which do not charge withdrawal fees for withdrawing crypto but most of the exchanges usually charge you a fee for withdrawing crypto, though the size of this fee is often dependent on the kind of crypto you’re withdrawing, please note that less popular and less valuable coins are usually free to withdraw even on platforms that charge withdrawal fees.
- Spread Fees
A spread fee is determined by calculating the difference between the cost of a token, like BTC or ETH, and the amount a user either paid to buy it or was paid to sell it. Average spread rates differ across exchanges but usually sit at around 0.5%. It is important to note that spread fees are often charged by exchanges which do not use the maker-taker fee structure
- Maker Fees
Make fees a charge by a number of big crypto platforms. Maker fees are an exchange fee which are charged to makers on a platform. A maker generally makes an order within an order book that can be fulfilled by someone else later on, not immediately. In simpler terms, they “make” the marketplace for other traders. As a result, makers are the best users an exchange can have, as they provide the platform with liquidity. Crypto exchanges mostly favor makers, maker fees are often lower than taker fees.
- Taker Fees
Takers remove liquidity from an exchange platform. A taker will take an order from an order book, therefore consuming or removing the liquidity it once offered. This happens when a user makes an order that is instantly matched by another order on the order book. As earlier stated, takers are less favoured by exchange platforms because they remove liquidity, as a result, a platform is a lot more likely to charge them a higher fee for their trade.
- Staking Fees
Staking has become an incredibly popular feature offered by a wide range of exchange platforms over the past few years. In short, staking involves putting up some of your funds as collateral in the Proof of Stake or Proof of Delegated Stake process, which, in turn, allows you to earn a passive income. But staking sometimes comes at a small cost. The good thing about staking fees is that they are usually taken out of your earned staking rewards instead of being set as an extra charge that a user has to pay.