How Do Crypto Exchanges Make Money?

Thanks to the increasing popularity of cryptocurrency, more and more exchanges are becoming available. That being said, not all exchanges are created equal, and you should definitely do your research before using one.

But how do you know which is the right one? How do cryptocurrency exchanges make money anyway? Don’t fret, we’ve got all the details, just keep reading!

How Do Crypto Exchanges Make a Profit?

While all cryptocurrency exchanges run slightly differently, they all operate on a single principle for making money: transaction fees.

Transaction fees are a major part of any blockchain or exchange, and often the fees are dynamic, meaning the larger the trade/sale, the bigger the fees. There are exceptions of course, but we have yet to find a popular method for exchanges to run that don’t include some sort of fee, either per transaction or per month.

It is important to note that many exchanges have expanded to offer lending products, such as cryptocurrency loans. In these cases, there may not be fees, but the charged interest is the profit retained by the company.

Are There Any Free Crypto Exchanges?

There are always rumors of “free” cryptocurrency exchanges, or market makers, which allow a certain number of transactions for free. While it is possible for exchanges to offer a deal to new members, any exchange that promotes free trades “always” should be met with extreme scrutiny.

As we mentioned above, there are some exchanges, like Coinbase or Kraken Pro, which use a monthly subscription fee instead of a fee for each trade, and these are a reasonable option for high-volume traders. However, if you are investigating a new exchange and they promote free trades and no subscription fee, run.

How Much Do Cryptocurrency Exchanges Make?

It is nearly impossible to estimate how much a certain cryptocurrency exchange makes unless it only runs on a subscription model and discloses its number of subscribers. This is because, as mentioned, most exchanges use a fee model, with a fee charged for each trade. As you can imagine, trades are fluid, with the number being executed varying widely—making it difficult to estimate how much revenue a specific exchange is making.

Of course, some cryptocurrency exchanges fall under regulated publicly traded business, which must disclose their earnings each fiscal year. So, if you invest in an exchange like Coinbase or Binance, watch for the quarterly tax disclosures to be released. If you trade on a DeFi platform, like Uniswap, there is no way to know exactly how much money the exchange makes, though you can make an educated guess by knowing their fee structure and average number of trades per calendar day.

Is It Expensive to Start a Cryptocurrency Exchange?

If you are reading this article for the purpose of designing your own cryptocurrency exchange, we highly advise against it. While we utilize and promote both CEFI and DEFI exchanges, we know how difficult and flooded the market is. Not only that, but the regulatory tape surrounding an exchange is something we wouldn’t wish on our worst enemy (unless you live in a country with no government, then you don’t need to worry about this).

Difficulty and regulatory red tape aside, it is not cheap to start an exchange. Whether you build your exchange from the ground up or buy pre-packaged code, the amount you will spend will add up quickly, especially if you are planning to piece together market-ready code to create a diverse trading platform.

If that weren’t enough, building a platform is only half the battle. After you spend thousands, maybe millions, to build, then you need to find a way to convince individuals to use your platform. Advertising, like everything else, isn’t free, and unless you plan a subscription model, you will need to take certain steps to ensure your early customers are happy, meaning it may take years before you can even break even.

Although the exact cost of building a cryptocurrency exchange will vary, know that it is not a low-cost endeavor.

How to Choose a Cryptocurrency Exchange

We hope that at this point, you are ready to use a cryptocurrency exchange that already exists rather than attempting to make your own. Below are the steps you can go through to ensure you pick the cryptocurrency exchange that is the right fit for you.

1. CEFI vs. DEFI

The first decision you need to make is whether to choose a centralized exchange or a decentralized one. In general, for beginners, we recommend a centralized exchange, just until you learn the ropes. Examples include Coinbase, Binance, and Kraken.

If you are already familiar with cryptocurrency, then a decentralized exchange is best. These just tend to vary far more widely than the range of centralized exchanges, which is why they aren’t recommended for beginners. Examples include Uniswap, Sushiswap, and PancakeSwap.

2. Cost/Cost Set-Up

The next question is, how much are you willing to spend for the ability to exchange tokens? Personally, we always use one with fees per transaction, and we don’t mind paying a little extra for a good interface. But if you are really looking to save money, be sure to compare fee rates and monthly plans before signing up for any platform.

3. Ease of Use

We always recommend choosing an exchange you are confident in using. If this means you have to pay a few higher fees, so be it. Remember, most mistakes and scams happen because people are certain of how a platform works and what they need to do to use it successfully. So be sure to choose one you can use with ease.

4. Legalities

Not all exchanges are legal in all countries, and it is important to choose one that is legal (mainly when choosing CEFI exchanges) so you won’t have to worry about breaking the law when you use it. Unfortunately, most DEFI exchanges exist in legal gray areas, and as such, it may be harder to know whether the one you have chosen is legal where you live.

5. Preferred Cryptocurrencies and Reviews

Lastly, ensure whatever exchange you plan to use has the cryptocurrencies you want to use, as well as positive reviews. Keep in mind that businesses can sometimes influence reviews, so ensure there is a wide range of reviews that describe the good, the bad, and the ugly. And if you ever find an exchange with fewer than 10 reviews, it is probably a scam, so stay away!