The days of paper banknotes and metal coins are gone. Everything has turned digital and cryptocurrency exchanges are at the heart of this financial revolution. They offer the freedom to trade, invest and profit, regardless of your level of knowledge in this field. Today we’ll learn how these exchanges cash in on various fees and services, as well as less obvious income streams which also fatten their profits. Whether you’re just getting into crypto or you’ve been trading for years, this guide is packed with useful info and easy to follow. Let’s go!
Key Takeaways
The topic is far from being simple ABCs and requires a thorough discussion. Here is a brief overview of what we are going to talk about today:
Trading Fees. Basically, it’s one of the main income sources for crypto exchanges. They charge these fees on every trade which is made on the platform. They can vary based on two parameters: the type of trade (either maker or taker) and the trading volume.
Listing Fees. When crypto exchanges partner with different projects, they charge them with fees for listing their cryptocurrencies. This way, exchange platforms get their profit and projects are provided with visibility and access to a larger user base.
Margin Trading and Leverage. If users want to trade the amounts larger than they initially own in hope to amplify their profits, exchanges can let them borrow the required funds and this way earn their interest and fees from it.
Staking Services. By using staking options offered on the platform, clients also share a portion of their generated rewards with the crypto exchange.
Initial Exchange Offerings (IEOs). Exchanges also help projects to facilitate the launch of new cryptocurrencies and host their token sales, and as you might guess, it’s not free of charge.
Cryptocurrency Lending and Borrowing. It works as simple as a bank loan, only here exchanges lend out cryptocurrencies and make money by charging interest.
Affiliate Programs and Partnerships. This is more of an additional revenue stream and its name speaks for itself: money comes from partnerships and commissions earned through affiliate programs.
Other Revenue Streams. This includes market making (providing liquidity to the market), premium services and advertising.
Surely, this is just a snapshot of how cryptocurrency exchanges usually generate their revenue. That’s why we invite you to read on and peek behind the curtain to explore in more detail the ways these financial giants make profits.
What Is a Crypto Exchange?
A cryptocurrency exchange is a sort of a digital marketplace where users can come to buy, sell and trade different kinds of cryptocurrencies. It can as well be viewed as a stock exchange, only in this case it’s for digital currencies (e.g. Bitcoin, Ethereum, etc.) Naturally, when working with finances, it all comes to this: buyers want to purchase crypto at the lowest price and sellers seek to offload their assets at the highest one.
So how do crypto exchanges work? In simplest terms, a company like this serves to match orders and facilitate trades. To give you an example: when a buy order is placed, the exchange starts looking for a matching sell order. Once the match is found, the trade is executed. On large exchanges it can happen almost instantly, due to a huge overall number of placed orders.
There are also two types of exchanges distinguished by their structure and the way they operate. Centralised exchanges, or CEXs (e.g. Coinbase), act as intermediaries between buyers and sellers. They have user-friendly interfaces and provide liquidity and necessary security measures. However, as they hold your assets inside their own ecosystem, it makes them vulnerable to potential hacker attacks.
On the other hand, with decentralised exchanges, the middleman is basically cut out. Blockchain technology allows users to trade directly with each other, therefore transactions can be considered to be more private and secure. But the downside is they usually have lower trading volumes which, compared to CEXs, means longer transaction times and less favourable prices. Besides, they might be a bit trickier to use, especially for beginners.
So, before using any exchange, always do your own research first! It’s important to look through their fees (both obvious and hidden ones) and security measures and read user reviews to make sure you are in good hands.
How Crypto Exchanges Generate Revenue
Now that we’ve covered what cryptocurrency exchanges are and how they function, it’s time to answer the question this article is actually about. How do crypto exchanges make money? There are several strategies up their sleeves, so let’s review each one in more detail.
Trading Fees
A lion’s share of cryptocurrency exchange profit comes from trading fees. Here are their common types:
Maker & Taker Fees. Exchanges often charge different amounts, it depends on whether you are a “maker” or a “taker”. Makers are the ones who place the orders that aren’t immediately matched, therefore they add liquidity. High liquidity means that you can not only trade at prices closer to the market but also do it quickly. Takers, on the contrary, remove liquidity as they match existing orders. That’s why makers usually pay reduced fees, compared to takers.
Tiered Structure Fees. Some exchanges introduce tier structures and charge corresponding fees based on a user’s trading volume. They usually take into account your activity within the last 30 days. If it’s high, you can pay lower fees. What a nice way to motivate loyal customers to trade even more!
Withdrawal Fees. Exchanges may charge fees when you withdraw crypto to your personal wallet. Of course, every blockchain transaction comes with a cost, but sometimes companies can set the fees higher when the actual network cost. It can be done to encourage users to keep their funds within the exchange and continue to trade. So it’s both practical and strategic. Neat, right?
Spread Fees. If you are not familiar with the term, the spread is simply the difference between the buy and sell prices. Everyone knows that cryptocurrencies are naturally volatile. That’s why when a company takes a small cut of the spread from each trade, it can add up to quite impressive profits.
Listing Fees
Let’s say you have a cryptocurrency project and you want to be known among potential investors. In this case, you need to partner with a crypto exchange of your choice and agree to have your coin listed. Obviously, it’s not free of charge as the company, on their part, has to cover certain costs: cryptocurrency integration, liquidity provision and meeting all the security standards throughout the whole process. The price you need to pay for this is what they call a listing fee.
The amount can vary tremendously, basically, it all depends on the size of the exchange, its audience and, consequently, the exposure it can offer. For small exchanges, the fee range is between $6,000 and $30,000, but if you partner with a high-volume exchange, the price can be up to $2.5 million. Pretty impressive, huh?
Margin Trading & Leverage
Traders can also borrow money from the exchanges to try their luck on the market. In simple words, you can trade much bigger amounts than you actually own on your account. For example, if you have $1,000 and opt for 10x leverage, there will be $10,000 worth of cryptocurrency at your disposal available for trading.
There are several ways how exchanges profit from margin trading. The first and the most obvious one – they charge interest on borrowed funds. If traders are held open for a long period of time, the amount can accumulate. Some exchanges may charge fees when traders are opening or closing the positions that they leveraged. There is also such a thing as a funding rate, it serves to balance out the market for buyers and sellers, and companies don’t miss the chance to take a tiny cut from it too.
Staking Services
As an attentive reader, you may have noticed the undeniable similarities between the working principles or crypto exchanges and modern banks. This income stream is no exception.
Users can profit from staking in the same way they can earn interest on their ordinary savings accounts but, in this case, with cryptocurrencies. Locking up crypto assets like this helps to maintain the blockchain network and get rewards for it.
But what’s in it for the company? If you thought that only users get their share and exchanges are left with nothing, prepare to be amazed.
With traditional banks, there are usually no fees for opening a savings account as they are focused on attracting clients to lend out their deposited funds at higher rates. As the whole blockchain “ecosystem” is much more complicated, exchanges charge fees for providing staking services in the first place, as they need to cover operational costs. Besides, they take a small percentage of the rewards earned during the staking period. Ka-Ching!
Initial Exchange Offerings (IEOs) and Launchpads
As we’ve already figured, running your own crypto project can be ridiculously expensive. Where do startups get so much money? IEOs might be a good way to begin.
In this scenario, centralised exchanges act as so-called “launchpads” where projects can come to sell their tokens and therefore raise funds for development. In order to enter, your project has to be qualified as “promising” and undergo all the necessary due diligence. Hosting token sales not only brings profit (facilitator’s reward) but also attracts more users, boosts trading activity on the exchange platform and has a positive impact on the company’s reputation.
Cryptocurrency Lending and Borrowing
We partially covered the matter of borrowing in one of the previous sections, but here the exchange platform lets the users lend and borrow assets from one another. As the company provides all the tech support behind the scenes, it fairly receives its share:
Interest Income. When one user borrows funds from another, they are bound to pay the fee to the lender, and a part of it goes to the platform.
Origination Fees. It’s a one-time payment at the very beginning of the loan which serves as a set-up fee for borrowing.
Collateral Liquidation. If you fail to pay back the loan, the company has a right to sell off the assets that you used as a collateral. This reduces the risks for the platform and brings them additional profit.
Generally speaking, it’s a triple win: lenders earn interest on their idle crypto, borrowers access liquidity without having to sell their assets and exchanges earn a good buck. Or a bitcoin, to be more exact.
Affiliate Programs and Partnerships
Crypto exchanges can generate additional profits through collaboration with both individuals and legal entities.
If you’ve been with us for quite a while, you might have guessed that platforms like these are no strangers to affiliate marketing. That’s why they often launch their own programs to motivate users to invite new customers. The process is standard: users generate their unique referral links, promote the exchange through all available channels and earn commission from referred users.
As for B2B collaborations, exchanges can run joint marketing campaigns, offer technology integration or launch co-branded products. For example, one of the most popular products in this field is physical cards which can be linked to crypto wallets. A very convenient option to spend your virtual funds, don’t you think? If we take the largest crypto exchanges by volume – Binance, Coinbase and Bybit, all three have active affiliate programs and strategic partnerships which help them earn money and expand their user base.
Other Revenue Streams for Crypto Exchanges
By now, it seems like crypto exchanges are really “rolling in the green” but we still have some more additional ways their earn their money to share with you:
Market Making. Exchanges provide liquidity, that is, keep the market stable, when they buy and sell assets. This job is hard but also well-paid.
Over-the-Counter Trading. Being powerful as they are, exchanges are capable of managing large trades without the impact on the market and, of course, charge fees for it.
Blockchain Rewards. It’s when they earn from mining or validating transactions on the blockchain.
Custodial Fees. These are charged for secure hold and management of users’ crypto funds.
Advertising. Revenue from ads displayed on their platforms.
How Profitable Is Running a Crypto Exchange?
From all the revenue streams we’ve discussed for far, trading fees are usually the most significant one. They often contribute over 50% of total income, can you imagine? All the other sources like additional products and services, collaborations, programs and advertising campaigns play their part in overall profit, but to a lesser extent.
Profitability is not something that can be taken for granted as it can be influenced by external factors. For example, market conditions are pretty sensitive and may vary due to political, social and environmental changes, scientific breakthroughs, etc. Growing operational costs and strict regulations can also have their impact.
In 2023, the total crypto market cap doubled from $832 billion to $1.6 trillion. This growth contributed to higher revenues for major exchanges like Binance and Coinbase. The continued expansion of the market in 2024 has further boosted profitability for these companies.
Conclusion
Do you know how many crypto exchanges there are? Over 1500 and counting! Even though its profitability can fluctuate due to various factors, this business model remains strong and attracts financial enthusiasts. The crypto market continues to evolve and, who knows, maybe one day you’ll want to try your luck out there as a company owner. Big profits to you and good luck with all of your future endeavours!
