March 2019 Changes in Top Exchanges’ Maker Fees May Push Small Investors Out
Many cryptocurrency exchanges saw an increase of day traders and long term (HODL) investors flood into their user bases after Nov. 2017 — as the price of Bitcoin soared. It is no surprise that a good number of these users have stopped trading once Bitcoin’s price corrected — but not all new users stopped trading. Bitcoin’s 2017 boom provided an opportunity for new users within the cryptocurrency exchanges to learn about cryptocurrency, to see how the exchanges were taking steps to distance themselves from the nefarious activities that surrounded earlier crytocurrency markets, and how investing principles could work in the cryptocurrency sphere, as opposed to the securities or foreign exchange markets.
One of the attractive aspects of some exchanges during that time was that they offered 0% fees for Makers. Market makers are those who provide liquidity to a market. Without liquidity, the exchange does not have volume for trading. Maker trades are made using a limit or stop order, as opposed to Taker orders which are filled immediately. For this reason, many exchanges offer lower fees, no fees, or a rebate as a reward structure for Makers. This reward system, particularly when it has 0% fees, allows day traders, among others, to use indicators, or other methods, to make modest gains (and sometimes losses) that a fee structure could effectively wipe out. If the exchange takes away the incentive, the day traders have less of a reason to trade and may stop trading all together, and volume liquidity goes down.
In Nov. 2017, one way to enter the cryptocurrency market without fees was to join one of the exchanges offering a 0% fee incentive for Makers. But, last month, that field of exchanges became significantly smaller when two exchanges announced that they will be doing away with the 0% fee incentive for Makers.
Coinbase Pro (formally GDAX), one of the more visible US based exchanges, announced that it would move from its previous 0% fee Maker structure to a percentage as high as 0.15% on 3/22/2019. Coinbase Pro states “[the] New fee structure … is designed to increase liquidity by reducing the delta between maker and taker fees”. Let that sink in… Remember: Makers provide liquidity; fees provide Coinbase with revenue (among its other revenue strategies). This move will work against Coinbase Pro’s volume, by discouraging volume from smaller traders who no longer have an incentive to trade in the market on their exchange. While Coinbase has been focused on institutional traders, they should also be focused on not losing their bread-and-butter users who brought them this far.
Liquid exchange by Quoine, based in Japan, announced that they too were changing their fee structure from their previous 0% fee to 0.05% for Makers on spot trades, which took effect on 3/20/2019.
So what’s the big deal, you ask? How is 0.05% — 0.15% going to hurt anything? Let me explain. Let’s say you entered the market, as a brand new user to the exchange, on a Maker buy order for $4,000. Your fees are in the 0.15% tier. Lets say that your market indicators are telling you that it is time to get out of the market, so you put in a Maker sell order for $4,010. $10 profit, not bad right? But, the 0.15% fees are on both the buy and the sale. So, the exchange just made $6 on your buy, and $6.02 on your sale, for a total of $12.02. In this scenario, the day trader just lost $2.02 to the exchange on what would have been a $10 gain under the previous structure. Which do you think offered more incentive for liquidity trading, the +$10 or the -$2.02? The day trader looks and sees how many trades under the new structure they are able to make to hit above the break even point, and for many, the fee structure may just break their incentive for trading activity on that platform.
I hope that Coinbase Pro and Liquid are listening: you don’t raise Maker fees when you are losing liquidity to try to gain liquidity. This would be like the government saying “we are going to raise taxes, particularly on the lower income class, to provide for a study in tax-payer relief.” I get it that you may not be able to offer greater incentives such as rebates during times that liquidity is suffering, but raising Maker fees does not increase liquidity, and it sure is not going to help you keep smaller investors in your customer base active in their trading.
To be fair, there a number of exchanges with fee structures for low end traders that are higher than Coinbase Pro and Liquid, such as Gemini, Kraken, and CEX.IO as a few examples. There are a few that are between the 0.05% of Liquid, and the 0.15% of Coinbase Pro, such as Bitfinex, OKCoin, HitBTC, and Gemini (for Fix and API trading) as examples. But, interestingly, there is still an exchange that not only offers 0% Maker fees, it actually offers a rebate, which is itBit. To be fair HitBTC does offer rebates, but only once you get past trades of 6,000 Bitcoins over the last 30 days… which is great if your user base is comprised of all millionaires, but it is not going to help the smaller everyday traders stay active, and therefore is not helping your liquidity.
The above list is not meant to be an exhaustive list of exchanges or an endorsement, and definitely is not meant to be a recommendation of any of these exchanges. In regards to itBit, unfortunately, they are the only exchange I could find as an example of 0% Maker fees (not to mention rebates for all Makers!). Yet, it is true that, unless some of these other exchanges recognize the fundamental fact that you want to reward the Maker, and that charging Maker fees for the small investor is not going to endear these people to you, or help boost liquidity for you in a time of lower overall volume than you are use to as an exchange.
It is also fair to recognize that other factors are involved in the total value of an exchange to the user, such as deposit and withdrawal fees, account charges, and foreign exchange fees. For the above exchanges, these can be found here: Coinbase, Liquid, Gemini, Kraken, CEX.IO, Bitfinex, OKCoin, HitBTC (deposit, withdrawal, crypto-deposit-and-withdrawal-fees), itBit (and account minimum charge — see section “Additional Fees For Certain Accounts”).
Hopefully the exchanges will listen; otherwise it just may be that some of their users may be taking a second look at exchanges like itBit (and any other exchanges out there, any???, who would like to join them in recognizing that the more incentive you give, the more people want to exchange on your platform).
Disclosure: The author is a Coinbase Pro customer, and has developed his own trading application to do API day trading in cryptocurrency.
