Irrespective of whether your crypto portfolio is up or down, it’s certainly making someone else rich. When Coinbase went public, they were valued higher than the three largest stock exchanges in the world, combined.
These exchanges are so richly valued because they charge more than 50x as much in fees as traditional financial exchanges. That’s real money out of your pocket and why we are going to breakdown these fees to help you understand the main costs of trading, holding and using crypto.
To make it easier to understand, we are going to split the fees into ones assessed by the exchange you are using, and the ones assessed by the blockchain ledger itself.
Side Note: If you want to understand fees even better after reading this, check out “How to make more money from trading crypto, Guaranteed!”
Exchange Fees
Exchange fees represent all of the money you pay an exchange like Coinbase, Gemini, Kraken, etc. for holding, trading, and transferring your coins. We’ve split it up into fees incurred from trading and general maintenance fees.
Trading Fees
Coinbase collected $1.1 billion in trading revenue on $193 billion in trading volume, or about about 0.57% of every transaction just in fees.
Trading fees represent the bulk of revenue for the exchanges and are drastically inflated for crypto vs traditional investments. Compared to that 0.57% fee rate, a traditional financial exchange like the NYSE only charges around 0.01%.
All exchanges usually make money from your trades in two ways. On the left is Coinbase’s fee disclosure highlighting the trading fees. The fee is comprised of two portions a Spread and an Order Fee (they call this the “Coinbase Fee”).
Order Fees/Transactions Fees
Order fees are pretty straight forward, they are a fixed or variable fee charged for each trade. Above you can see how Coinbase has fixed thresholds up to $200 and 1.49% of the total beyond that. This is assessed on every trade, buy or sell.
Spread (The Hidden Fee)
Spreads are a bit more complex and harder to evaluate. Every exchange has a price they’ll pay to buy a coin from you when you sell coins (called the bid), and a price they will sell you a coin at when you buy coins (called the ask). The spread is the difference between the two quoted prices and is normally small for frequently traded assets, as of writing the bid ask spread on AAPL was 0.007%, let’s take a look at crypto exchanges.
It can be for crypto exchanges as well, at the time of writing, this is Coinbase’s bid/ask spread for their Pro product and Standard Coinbase. Essentially if you buy 1 BTC on Coinbase Pro and immediately sell it, you’ll lose a penny. On Coinbase Standard, you’ll be out $387.48 even before transaction fees on that trade. High spreads cost you a ton of money and can be very high. To make it more complicated every trading pair on every exchange has it’s own spread. Here’s a link if you want to see all the spreads and exchange rates in real time.
Maintenance Fees
In addition, most exchanges charge fees when you transfer money. Either into, off-of, or even internally in their exchange. Here are a few of the main fees:
Deposit/Withdrawal Fees
These are some of the trickiest fees to watch out for. Kraken charges for both crypto and fiat deposits with very few free options. Coinbase charges a substantial fee of up to 4% for anything other than an ACH fiat deposit.
In addition, you’ll face even steeper fees when trying to withdraw. Kraken charges substantially more to withdraw crypto and fiat currencies and has no free options. Coinbase luckily doesn’t have any withdrawal fees except for their instant withdrawal debit card.
Wallet/Transfer Fees
Luckily, these fees seem to be relics of the past. Most major exchanges now provide wallets and transfers for free, baring some holdouts such as Gemini’s 0.4% Custody Fee, and Kraken’s address set-up fees for receiving money into your account.
Staking Fees
Staking fees are the newest type of fees at exchanges, and they are expensive. Coinbase charges 25% of all staking profit in fees, and Kraken isn’t that far behind with 15% on all ETH staking. Chances are if you are staking through an exchange you are losing15–30% of your returns to their fees.
Blockchain Fees
In addition to exchange fees, you generally incur fees whenever you transfer funds between wallets and that transaction is validated and recorded in the blockchain ledger (this is also called an on-chain transaction). Generally, on-chain transactions are very expensive and slow, so there are a myriad of other ways to transact without needing to record the transaction in the blockchain ledger. These solutions span the technologically sophisticated lightning network, to an exchange having a common on-chain wallet for all its users and using an internal database to keep track of which user owns what % of the wallet.
Ledger Transactions fees
Ledger fees are dependent on the specific type of coin you are transferring and the network demand at that given moment. These fees are highly volatile and shift drastically in both short and long-term time periods. As an example, transferring any amount of Bitcoin on April 21, 2021 would incur a fee of $62.79, but that same transaction would only incur $3.21 at the time of writing, just 3 months later.
Off-chain Fees
Most exchanges provide free internal transfers by keeping all the internal transactions off the chain and only initiating an on-chain transaction when coins need to move externally off their platform.
Externally, the lightning network sacrifices some security in order to speed up transactions and potentially reduce fees to a fraction of a cent. Unfortunately, it’s not a magic bullet as it requires the two nodes to open and close the channel with an on-chain transaction each time which could incur substantial fees especially if the channel only sees a few transactions before being closed.
Conclusion
While cryptocurrency is a new, exciting frontier in financial services, there are a ton of fees and hidden costs to watch out for and track. We’ve tried to summarize all the different types of fees for you in an attempt to help you keep as much of your hard-earned money in your pocket as possible, and hope this primer was helpful.
If you feel that your fees are too high, check out our fee guides by exchange to see how you can save on fees.
Coinbase & Coinbase Pro Fee Guide
Kraken Fee Guide
Gemini Fee Guide
If you are feeling overwhelmed and don’t want to build your own custom Excel to track all the different types of fees; Stardust will summarize all your fees and returns and benchmark you against your peers so you know if you are on target or if you can improve.
Join Coinmonks Telegram Channel and learn about crypto trading and investing
