Why are crypto exchanges charging exorbitant withdrawal fees?
If you have traded crypto in crypto exchanges and want to withdraw them to your own wallet or transfer it to another exchange, you might be surprised by the high withdrawal fees. Why is this the case? How do you justify the high fees?
To understand what is happening, we have to understand how a blockchain transaction work. There are many factors at play during a withdrawal. Unlike withdrawing money from an ATM, transactions in most of the blockchains require a compulsory transaction fee in the protocol level. This fee is necessary to prevent people spamming the network. Unfortunately, this fee can fluctuate depending on different conditions. Let us take Bitcoin for example since its the most popular crypto at the moment.
- Network traffic
When a lot of people are transacting, the miners give preference to transactions with higher transaction fees. This means that a transaction with lower fees get pushed back into the queue and might take longer to be included in the next block. Exchanges might take the initiative to increase the transaction fees so as to get faster block confirmations.
2. Unspend Transaction Outputs (UTXOs) coin selection model
Different wallet might use different ways to select UTXOs when spending funds. There are a few methods to do it and each method has its pros and cons. Whichever method selected will determine the transaction size and therefore affect the transaction fees. For example, a transaction with very high number of inputs will attract higher transaction fees.
3. The exchange have no idea what’s going on
Some exchanges simply use a white label product and have no technical knowledge of how the blockchain works. They simply use all preconfigured values (including withdrawal fees) out of the box.
So what is really happening?
When you withdraw your Bitcoin from the exchange, the exchange will need to make an on-chain transaction and pay the transaction fees. At the same time, the exchange will need to make a profit by charging you a percentage of your total transfer value. Let’s call this fee the exchange fee. Some exchanges include the transaction fee in the exchange fee while some charges you 2 times (Most users didn’t even realised this). Most exchanges only provide you the link to the historical withdrawal transaction in the blockchain but don’t record the transaction fees incurred at that time. Hence, it would be very hard to go back and check how much transaction/exchange fees you were paying after the withdrawal was made.
Are you being ripped off?
Many people think that crypto exchanges earn a lot from exchange fees. This is true for large transactions but most of the time, many transactions are small, like 0.1 btc. As many exchanges like to charge a flat fee for transaction, say 0.005 btc per withdrawal and they might only pay 0.001 btc for the actual transaction fee (especially when the network traffic is low), they are keeping 0.004 btc for themselves. Nobody questioned this profit. If they have lots of small withdrawals, they will earn a lot more from transaction fees than exchange fees.
Exchange’s argument
Crypto exchanges need a lot of funds to stay alive and provide a secure trading environment. One could argue that charging high fees would help them provide premier service.
Conclusion
Most traders are not technical enough to know how withdrawal fees are calculated. It’s actually not hard to work out how much the exchange is earning per withdrawal if the user inspect the transaction (its easily available in the blockchain explorer). It’s then up to the user to decide if the exchange is charging exorbitant withdrawal fees or not.
