Everybody in crypto has the same goal – to earn profit. Aside from some unfortunate trades, there are other factors that empty our pockets: The fees.
Cryptocurrency exchanges, trading apps and other service providers charge for every trade execution, some even ask for extra payments. Although we are charged small amounts, such fees may result in large losses, especially if we trade frequently or in large amounts.
Let’s look at what the main fees are every new crypto trader should be aware of:
I. Exchange Fees
A cryptocurrency exchange is a 24/7 marketplace, where buyers and sellers can exchange one currency for another. All crypto exchanges charge fees, which are their main revenue streams.
Different exchanges apply different fees but in most cases you’ll find these same terms on crypto trading platforms: deposit, withdrawal, and trading fees.
1. Deposit fees
The majority of crypto exchanges do not charge fees for depositing funds. This is standard policy to encourage new users to enter the crypto space.
On the other hand, some of them aim to encourage trading with cryptocurrencies and, as a result, may apply small fees on fiat money deposits, while crypto deposits are free.
In addition, banks or payment service providers usually charge clients for depositing money into cryptocurrency platforms. They may charge from 1.8% to 5% fee for processing funds directly from a credit card. Transfers from bank accounts usually come for free but they may take up to a few days to complete.
2. Conversion fees
Crypto exchanges or even cryptocurrency wallets charge fees for converting cryptocurrencies from one to another. The same conversion fees apply for exchanging traditional (fiat) money to cryptocurrencies.
3. Trading fees
The main fee that cryptocurrency exchanges charge users are trading fees. These are the fees that everyone pays whenever buying or selling crypto.
Trading fees are separated into two categories: maker fees and taker fees. The key difference between them is how users place their buy or sell orders.
- Maker fee
A maker fee is paid by the market makers. These are the traders who put buy or set orders with the settled price. These orders are executed at any time when the market meets their conditions.
For example, you place a buy order to buy a coin at exactly $0.99. If the price drops below $1.00, the order will be executed. If it rises above $1.00, the order stays pending until it’s canceled or the price reaches $0.99.
- Taker fee
The taker fee is paid by the market takers, the participants that agree to buy or sell assets immediately. This means they agree with the current price and their orders match with the offers of market makers.
Taker fees are a bit higher than maker fees, mostly because takers are the ones that take the liquidity out of the market, while makers are the ones who provide it. However, both of them apply only when the orders are executed.
- Spread fee
Some crypto exchanges might not apply any maker or taker fee but will charge a spread fee instead. Spread is the difference between buying and selling prices of a certain cryptocurrency trading pair.
This means the exchange will charge you a fixed percentage of the difference between buy and sell prices. The spread fee is not unusual on crypto exchanges, it also may vary for different cryptocurrencies.
For example, you buy the coin at $0.90 and sell it at $1.50. The spread here would be $0.60. The exchange applies a spread fee of 0.75%, which would be $0.0045 on the $0.6 price difference.
4. Withdrawal fees
Whenever you move digital assets out to your own crypto wallet or to another exchange, you have to pay withdrawal fees. These fees are usually meant to cover the transaction costs for leaving the platform.
The trick is, they are not completely set by the exchanges themselves. A withdrawal fee is a complex combination of network fee and exchange fee. The exchange has no control over the network fee, however, it charges its percentage from the total transfer value to compensate for the operating costs.
Because of the network fees involved, withdrawal fees are different for separate cryptocurrencies. They are adjusted depending on which blockchain the coins operate.
5. Extra fees
Crypto exchanges, trading platforms or apps may charge additional fees from their users. This means traders will be asked to pay not only for executing their buy or sell order, but also for other services.
Some platforms charge users with an extra fee for maintaining their account or ask for an inactivity fee on a monthly, quarterly or yearly basis for infrequent trading.
II. Crypto Network Fees
Cryptocurrencies operate on different blockchains. Each transaction needs to be processed, verified and thus added into a new block. This process involves miners and validators, who need to get compensation for their work. This compensation is called a network fee.
The more popular a blockchain is, the more transactions happen on it, and the more congested it becomes. This means transactions stand in the queue and wait for confirmation, which might take hours or even days.
To confirm orders quicker, some users agree to pay higher network fees and get a priority. This is why network fees might get extremely high when the network becomes crowded.
Crypto investors have to pay network fees every time they move their coins from cryptocurrency wallets or from one platform to another. Yet some crypto exchanges take network fees on them and allow users to transfer assets freely between wallets of the same platform.
III. Income taxes
Cryptocurrency legal statuses and regulations are different across various jurisdictions worldwide. However, this does not necessarily mean that investors can avoid paying taxes on their cryptocurrency gains.
Depending on the jurisdiction, local revenue services may require crypto traders to declare their profits from cryptocurrency sales. Total income is a result of mandatory tax paying amount and varies according to local laws and tax policies.
On The Flipside
- Centralized and decentralized exchanges list different cryptos. Trading among them requires multiple transactions, including transfers through cryptocurrency wallets. This certainly costs a lot, especially if you trade frequently and in large amounts.
Why You Should Care?
Exchanges apply different fees. They may offer low or no trading fees, but spread fees or even withdrawal fees might be significant. Fees are one of the main criteria when choosing a trading platform. Everyone new should evaluate them in advance. It’s your money after all. No one wants to lose money where it is not necessary.