How do crypto exchanges make money in 2023? Guide for striving investors

Alexey Sidorowich Ex Commercial Director

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Crypto exchanges can stay afloat and profit even during business depression, in contrast to financial investors and private actors. This results from the essence of crypto exchanges to form the market and stimulate the trade. Today, we will discover how much these platforms earn, find out about their income streams and get an insight into their peculiarities.

What is a cryptocurrency exchange?

A cryptocurrency exchange is a site for traders to buy and sell one digital currency for another, digital or fiat. It is a way to get crypto, apart from mining and air drop. The most known platforms are Binance, Kraken, Huobi, OKEx. To learn more about the functionality of such environments, see cryptocurrency exchange software by Merkeleon and How To Start Your Own Crypto Exchange In 2023?

Trading volume on crypto exchanges

In its analysis, Blockchain Transparency Institute (BTI) researches how much crypto exchanges make, from the perspective of transactions conducted by real users, not tding bots whose impact can amount to 70%. So, if the average number of daily operations is 27,000, the average volume of these transactions is $2,503, then the total average income is about $67.5 million.

This may seem an overly optimistic scenario, especially for emerging unknown sites, so they take an exchange with a minimum number of users, Bisq, with 394 clients, and a minimum transaction volume per active user from Coinbase, $189. As a result, BTI totals $75.5 thousand in daily transactions.

How does a crypto exchange make money?

Well, it’s time to find out how the world’s crypto exchanges revenue. Profit here is the balance between income and expenditure for, say, service maintenance, promotion, liquidity support, taxes. Let’s move on to the details.

Trading Commission

It is the main revenue stream that crypto exchanges use. Trading commissions amount to tenths of a percent for one transaction. Nevertheless, if we take an average fee of barely 0.1–0.2% and multiply it by the daily trading volume, we will find a share of profit.

To bring fees and consequently steady income, active trading requires suitable conditions; a major prerequisite are real users. There exists a whole lot of other mechanisms that trigger trading activity, agreed, like market makers and trading bots. Nevertheless, it is only live clients that fuel service fee, thus gaining.

The trading volume on heavyweight platforms extends from $100 million to $1.5 billion. The rough turnover on Binance for BTC/USD pair averages $300 million. With a fee of 0.1% we can figure out that it brings $300 thousand per day. And it is only one trading pair out of an extensive income inventory.

Listing Fees

Major crypto exchanges collect from $2 to 5 million for listing a new coin to traded cryptocurrencies. Some may even charge up to $10-15 million. There is no average listing price: it is rated for each project individually, judging from the intended service package, which may involve, for example, marketing promotion or technical expertise.

For evolving crypto projects, listing on a big platform means increased popularity and quicker entry to investors. Moreover, after listing, these coins rapidly grow. Fun fact, heavy crypto exchanges opt either to conceal this revenue item, or show off their reluctance to list third-grade coins, named “shitcoins”, on no account.

Market making

Market making (MM) function enables high-quality liquidity and uninterrupted execution of orders. It supports quoted prices in a certain range, provides additional liquidity and prevents price gaps. For example, a user buying an altcoin to sell it on an illiquid exchange, makes a sale order. Hence, the asset is instantly bought.

Clients might think that transactions quickly occur between regular traders. But in most cases, it is market makers that purchase orders for further resale. MM is available on each site and guarantees liquidity. In a reverse situation, traders would wait weeks before they came across at a buyer.

Margin Trading

Margin trading or leverage involves a trader who borrows money from the exchange to increase their purchasing power, with the potential for higher profits and, essentially, higher risks for a trader. The mechanics of such device is closely related to financial loans. Yet, it is a misconception to think that a client remains in debt if their forecast malfunctions.

The exchange’s leverage basically adds the order volume. A trader will lose no more than they have, and the exchange won’t fail either. If a trader has $10,000 on their account and chooses to buy bitcoin in the hope that it will rocket in the future, with x5 leverage, they can buy bitcoin for $50,000. Should the rate decline and bitcoin go cheaper, the exchange will usually stop at a client’s $10,000 and notify them with a margin call, or vice versa.

Bear in mind that launching the module is more reasonable when the operator has already accrued some trading volume. Plus, it is desirable to have enough active users and massive capital for liquidity and reserve, since this activity is directly linked with the risks of customers’ non-payment.

Services for earning

Cryptocurrency exchanges can earn providing services that allow users to earn: staking, lending, crypto marketplace. When staking, users lock cryptocurrencies in a wallet to support the operations of a blockchain network. By doing so, they participate in the network’s consensus mechanism and earn rewards in return. The exchange gains revenue by charging a fee or taking a percentage of the staking rewards generated by the delegated coins.

Lending enables users to lend cryptocurrencies to other users or institutional borrowers in exchange for interest payments. Exchanges act as intermediaries, matching lenders with borrowers and ensuring the smooth execution of lending transactions. The exchange generates revenue by charging fees or taking a percentage of the interest earned by lenders.

Alternatively, crypto exchanges can provide services of a crypto marketplace. On the crypto marketplace users can buy and sell assets. These marketplaces can work with digital assets like NFTs and cryptocurrencies, or familiar products like Bitrefill gift cards and phone refills. Exchanges charge trading fees. These fees can be a percentage of the transaction volume or a fixed amount per trade.

Token Launchpad

Listing fees is the primary way exchanges generate revenue from token launchpads. Projects that want to launch tokens on the exchange’s platform are required to pay a fee. This sum covers the costs associated with due diligence, legal compliance, technical integration and marketing efforts to promote the token sale. The listing fee structure can vary depending on the exchange and the specific services provided, with some exchanges offering tiered pricing based on the project’s size or requirements.

In addition to listing fees, exchanges may negotiate additional revenue-sharing agreements with the projects. This can involve taking a percentage of the tokens allocated to the exchange as part of the token distribution, or receiving a percentage of the project’s future revenues. These arrangements can provide exchanges with ongoing revenue streams, especially if the project becomes successful and generates substantial income.

Furthermore, exchanges may offer value-added services to projects launching on their token launchpad. These services can include marketing support, advisory services, token sale management, technical assistance. By charging fees for these supplementary services, exchanges can generate additional income and provide a comprehensive package to help projects navigate the token launch process successfully.

It’s worth noting that token launchpads also benefit exchanges by attracting new users and increasing trading activity. Successful token launches often lead to increased trading volume as investors buy and sell newly listed tokens. This heightened trading activity generates transaction fees.

Complementary services

Also, crypto exchanges profit through connected complementary services. These can be connected games or decentralized applications (DApps). Crypto exchanges can collaborate with game developers by providing the necessary infrastructure, liquidity and access to their user base. In return, exchanges can earn a percentage of the transactions or fees generated within these games. This revenue-sharing model benefits both the exchange and game developer, as it incentivizes user engagement and encourages more people to participate in the ecosystem.

Besides, crypto exchanges may collaborate with prepaid card providers to offer cryptocurrency debit cards or prepaid cards linked to users’ exchange accounts. These cards allow users to spend crypto in real-world transactions. Exchanges can earn revenue through card issuance fees, transaction fees, or revenue sharing with the prepaid card provider. This integration of cryptocurrencies into everyday spending expands the use cases for cryptocurrencies and increases adoption.

Key Takeaways

So, what elements govern the gainings of cryptocurrency exchanges? How much money do crypto exchanges make? The bottomline, that you might have already deduced, lies in active traders who bring a steady yield. If you wisely assess risks and properly deduce several scenarios, even during a stagnant market, you can keep your exchange well operating and profitable. Learn what AML/KYC in crypto looks like.