When the first cryptocurrencies launched over a decade ago, many cryptocurrency enthusiasts thought that the wide-range adoption of digital assets would mark the beginning of the end for the middlemen, such as the banks and brokers that charge fees in exchange for their services. But this scenario seems unlikely today, as new crypto-markets and trading platforms spring into existence around the world, growing their user-base, and their fees along with them.
It’s become so important for cryptocurrency traders to understand how trade fees work – so that they can make good decisions and minimize the cost of buying, selling, and trading digital assets.
That’s why we prepared a short guide to explain what you are paying for when you make cryptocurrency transactions and how you can minimize the costs associated with trading.
What Do Trade Fees Cover?
There are two kinds of trade fees that are attached to cryptocurrency transactions. When you buy, sell, or trade a cryptocurrency like Bitcoin, there is usually an attached transaction fee to the price. Transaction fees are also known as network fees, and they may vary depending on the network traffic of the digital currency of your choice.
Also, most crypto trading platforms charge a commission fee for buying, selling, and trading digital assets. These are known as exchange fees and they change depending on the platform and the transaction amount. While crypto exchanges are often the most convenient places to make cryptocurrency transactions, their commission fees can be steep, so it is important to know how much they charge before using the platform.
Here is a breakdown of each fee type that will give you a clear picture of how they work.
How Do Exchange Fees Work?
Cryptocurrency exchanges are online platforms for digital currency transactions. They make digital transactions quite convenient for buyers and sellers, operating as marketplaces for digital assets. However, they also charge you exchange fees for the convenience they provide.
Crypto exchange platforms may charge fees for depositing and withdrawing digital currencies, as well as for each trade that takes place on the platform.
On a side-note, if you’re looking for a reliable local exchange, have a look at our comparison of the top Australian crypto exchanges.
What Are Deposit and Withdrawal Fees?
Most cryptocurrency exchanges provide free depositing, at least with one type of payment method, such as a bank account, since depositors help the exchange platforms by bringing liquidity. However, you may still have to pay commission fees to your bank if you are using a credit card or debit card to buy cryptocurrency with fiat currencies.
You might be able to avoid deposit fees if you are buying cryptocurrencies with cash, but that might end up being the more expensive choice. For example, Bitcoin ATMs also charge around 7-9% of the transaction as a commission fee.
Withdrawal fees are more common, and they vary depending on the digital currency, the amount you are withdrawing, and sometimes on the region where you make the transaction.
What Are Maker and Taker Fees?
Exchanges charge you a trading fee for each transaction on the platform. The fees change depending on what kind of order you place on the exchange. You can either place a maker order or a taker order, depending on the price you are willing to buy or sell your digital assets at. Depending on your order, you pay maker or taker fees.
Taker fees are typically higher compared to maker fees because they take away liquidity from the platform by matching with existing orders. Maker fees, on the other hand, add to the liquidity pool of the crypto exchange.
If a trader places a sell order on the market for their digital asset at a higher price than the highest offered buying price, that makes them a market maker, and they are charged a maker fee for their transaction. Similarly, if a trader places a buy order at a price lower than the lowest offered on the platform, they pay a maker fee for their order.
Makers extend the available price range of a crypto exchange’s order book, so they are provided with an advantage when it comes to trade fees. However, since maker orders don’t immediately match with already available orders on the order book, they might take a while to fulfill until the set price is matched.
If a trader places an order that can be matched by the existing offers on the crypto exchange, they pay a taker fee for their transaction. Takers can quickly complete transactions but they often have to pay higher fees.
If the brokerage jargon sounds intimidating, here is an example that illustrates how maker and taker fees work.
Let’s say Alice wants to buy Bitcoin at a lower price than the current price on the market. She places a buy order for 1,000 USD in exchange for 1 BTC. Alice has to wait until her buy order gets fulfilled by a matching sell order. That makes her a maker.
If someone makes a sell order for 1,000 USD for 1 BTC, they are taking Alice’s offer on the order book. In the final transaction, Alice pays a (usually lower) maker fee and the seller pays a taker fee.
What Is a Fee Discount?
New users can benefit from fee discounts at certain crypto exchange platforms. Trade fees are also lower for higher transactions. If the cryptocurrency exchange has a native token, they might offer a discount for trading that specific digital currency as well.
How Are Trading Fees Calculated?
Fee structures and fee schedules change from one cryptocurrency exchange to another. Some crypto exchanges apply a flat fee for deposit and withdrawal fees, though there are also exchanges that apply percentage fees based on the transaction amount.
Users who have a higher trading volume might pay lower fees. If you trade frequently or trade large amounts of cryptocurrency, this would be a favorable option.
How Does Margin Trading Work?
Some crypto exchange platforms, such as Kraken or Binance, let users borrow cryptocurrency from the exchange in order to make larger transactions. Traders pay additional fees for the borrowed digital currencies, and interest rates apply.
Margin trading is considered a risky investment and is not generally well-received by regulators. For example, Gemini doesn’t allow margin trading on the platform, and Coinbase suspended all margin trading. Even Binance has suspended margin trading with Euro, Sterling, and Australian Dollar pairs.
Do Decentralized Exchanges Charge Trade Fees?
Decentralized finance (DeFi) platforms are alternatives to centralized crypto exchanges such as Coinbase, Binance, or Kraken. Decentralized crypto exchanges provide lower exchange fees but they are also smaller than centralized exchanges and have limited liquidity. While the lower fees might seem attractive, the longer wait periods may not be suitable for frequent traders.
You can’t buy or sell cryptocurrencies in exchange for fiat currencies on decentralized exchanges per anti-money laundering regulations.
What Are Network Fees?
Network fees or transaction fees apply depending on the network traffic on the digital currency at a given time. Initially, network fees were designed as a way of making spam transactions costly, in order to keep cryptocurrency blockchains safe from such tactics.
The transaction fees for a digital asset may increase as the asset’s trading volume increases. Cryptocurrency blockchains can process a limited amount of payments per second, and miners usually pick the transactions with the highest network fees to process first, since they receive those fees. This means that you might have to pay more in transaction fees if you are making an urgent transaction.
Bitcoin and Ethereum (ETH) usually have higher transaction fees compared to other altcoins, such as Litecoin (LTC) or Bitcoin Cash (BCH), since they have larger trading volumes. Transaction fees are usually higher when cryptocurrency prices increase or decrease sharply, incentivizing more people to buy or sell their assets. Blockchain explorers show how much transaction fees cost on average at a given time.
A Few Words Before You Go…
Cryptocurrency trade fees change depending on the exchange platform, the particular digital currency you’re trading, and how much of it you are trading. Since different crypto exchange platforms have different fee structures, it is best you compare a few exchanges beforehand.
The old adage that “if a deal looks too good to be true, it probably isn’t” applies to exchange platforms that charge too low fees, so when hunting for an exchange, we recommend putting reputation before price.