The competitive exchange space: Trading fees continue to drop

With over 120 exchanges now competing for traders – crypto exchanges are offering lower fees in an attempt to entice new users.

The growing exchange ecosystem

The 2017 crypto bull market brought a wave of new entrepreneurs to the industry who launched exchanges to tap into this burgeoning market. Several of today’s leading exchanges were launched in the last three years, including Binance, BitForex, and DigiFinex.

Crypto trading volumes, however, have not kept pace. During the 2018 “crypto winter,” trading volumes dropped well below their 2017 highs. It took until Q2/2019 – when “crypto winter” began to thaw – for trading volumes to recover and surpass their 2017 highs.

While volume has picked up substantially in 2019 versus 2017, there is almost three times the number of exchanges that were available then.

Additionally, the fast-growing crypto OTC market is putting pressure on exchanges. While there is no hard data on how much crypto trading is conducted over-the-counter, anecdotal evidence suggests that it may be up to three times the volumes that we can see on exchanges. VCs, crypto funds, and institutional investors generally prefer to trade OTC, which means exchanges are not benefitting as much from the institutionalization of Bitcoin as they would like.

The first cut is the cheapest

A number of exchanges have already started to cut fees – either temporary to entice new users to join or permanently to set a new standard. A handful of trading platforms have even cut trading fees entirely.

Most crypto exchanges used to charge 0.25 percent per trade. Today, a large number of leading exchanges – including Binance, Kucoin, and Liquid – are charging price takers only 0.1 percent, while the likes of Bitfinex, Huobi, and IDAX charge 0.2 percent per trade. However, some exchanges have lowered their fees even further to attract more users to their platforms.

In August, Hong Kong-based HitBTC announced that it had cut its fees to offer “the lowest fees on the market.” The new fee schedule starts at 0.07 percent for price takers for traders with a 30-day trading volume of less than 500 BTC, and goes as low as 0.02 percent for traders who trade over 100,000 BTC each month. Price makers, who trade over 50,000 BTC on a monthly basis, even receive a rebate of 0.01 percent on trades.

Chicago-based exchange Seed CX announced in September that it had cut its trading fees after several weeks of high trading volumes. Price takers are charged only five basis points while price makers receive a one basis point rebate.

Poloniex, which has recently been spun out of Circle, announced on October 18 that it cut all of its spot trading fees to zero until the end of the year. While this is only a temporary action to entice international traders to register to the platform, it shows that exchanges are willing to take this step as new users become increasingly difficult to acquire.

As the competition for new users increases, we can expect trading fees to continue to compress. Additionally, all it would take is for Binance or one of the other leading exchanges to adopt a zero-fee trading model for the rest of the market to be forced to follow to stay competitive.

The race towards zero in legacy finance

The “race towards zero” trading fee can already be witnessed in the traditional retail brokerage market.

In early October, Charles Schwab announced that it would cut its fees to zero for stocks, ETFs, and options trading. This move forced many of its competitors – including Ally Invest, Fidelity, E-Trade, and TD Ameritrade – to follow suit.

The zero-fee model has been pioneered by fintech startup Robinhood. In light of the substantial user growth that the California-based startup has experienced, it was only a matter of time for other retail brokerages to follow suit. In 2018, Robinhood also added crypto assets to its array of assets, which put added pressure on crypto exchanges to reduce fees.

Moreover, passive investing has become more popular and easier than ever – partly due to the emergence of so-called “robo-advisors” – which has forced brokerages to cut fees to retain customers.

New monetization avenues

Crypto exchanges have already responded to the increasingly competitive environment by exploring new monetization avenues to become less reliant on trading fees.

Charging a listing fee for new assets has been a popular revenue stream while platforms that enable margin trading also charge lending fees. There are also withdrawal fees, although they primarily exist to cover blockchain transaction costs.

Airdrops, which are intended to promote new projects, are another way exchanges earn revenues. Initial exchange offerings (IEOs) have become an additional monetization avenue this year, although many experts suggest that IEOs will soon have to give way to the STO as regulatory pressure mounts.

What is clear is that exchanges will need to continue to explore new revenue models in order to survive in a zero-fee trading environment. As the recent wave of exchange closures shows, relying primarily on trading fees will not cut it in the increasingly competitive exchange ecosystem.