Do you want to make money by investing in cryptocurrencies? “Buy low and sell high!” Sounds easy, right? Well, the equation is a bit more complex than that, and the volatile price is just one variable in the purchasing process. There are exchange fees, network fees, conversions fees, and even when the broker platform you’re choosing claims zero fees, you might want to check the price rate — it can come at a 5–10% premium than the actual market price. If you want to make sure your math is right and you won’t lose money on an apparently successful investment, you need to be aware of all the hidden charges or pricing strategies of these third parties.
In this article, we’ll reveal five ways in which cryptocurrency brokers are taking their cut while your investment is shrinking all the while. Let’s try to figure out how much it will cost you to get your tokens safely delivered into your wallet.
1. Network Fees
Dealing with platform fees is nothing new. Cryptocurrency brokers are working with businesses and paying for the services they provide is to be expected. However, your stake is starting to shrink even before reaching them. Due to the decentralized nature of cryptocurrencies, you have to pay the standard network fee for using the blockchain, known as the transaction fee paid to the miners.
All blockchains have their own system for transaction fees. Although setting the amount you’re willing to pay is in your control in your wallet’s interface, it’s much more limited than you think. The lower the transaction fees you are willing to pay, the longer it will take for your transaction to be verified. Currently, most blockchains have a limited block capacity. Your transaction priority is set by the amount you’re willing to pay, thus miners are financially motivated to solve the block with the highest transaction fees first. So the fee is up to you based on the urgency of your transaction.
Almost all the wallets let you adjust the fee preferences before making a transaction, and most of them also provide a predetermined price that will ensure your transaction will come through within a given time frame. In the case of Ethereum, the “gas fee” can range from 1 Gwei (a denomination for ETH; 1 Gwei = 0.000000001 Ether = ~$0.00218) per transaction for a waiting time of 30 minutes per block, to 40 Gwei (~$0.08736) for a 32 seconds confirmation time. Given that most of the exchanges require a minimum of 36 confirmations, by paying a low amount you might end up initiating the transaction now and making the actual trade after a few hours or even days.
If you’re sending thousands of dollars, the network fees might mean nothing to you. However, trying to convert $5 worth of crypto, these small transaction fees become much more significant.
2. Wallet Fees
No, your tokens haven’t reached the broker platform yet and there are still charges on the way. While the previously mentioned network fee is common for everybody, regardless of the way you’re choosing to access the blockchain, the wallet fee is trickier and can be avoided altogether.
Having a cryptocurrency wallet is the same as having a valid blockchain address. The blockchain is a peer-to-peer network run by the people using it. Miners running full nodes are powering the network and they are getting paid for it (the network fee). Creating a wallet (generating the address), receiving some tokens, or sending them to another address is all done on the blockchain network. With enough programming knowledge, you can programmatically access and broadcast these by yourself. But, because technical knowledge shouldn’t be a restriction when using cryptocurrency, user-friendly interfaces have been developed so anyone can handle the basic operations as easy as accessing a website. While you’re safely managing your tokens, the development and updates of these software solutions aren’t free. There are minor fees charged after your first deposit or when making a transaction, and these are going straight to the company that created it. The fees are usually extremely small (around 0.001%) but even if the fees are usually extremely small (~0.001%), there are open-source solutions created by cryptocurrency supporters that come with no fees at all. We can mention the most popular ones, like MyEtherWallet for Ethereum or Bitcoin Core for Bitcoin, but as there are so many other tokens out there, you should always remember that it is your responsibility to choose your wallet carefully so you won’t pay unnecessary fees.
3. Premium rate
If you are new to crypto or occasional investing, you might prefer the simplicity of services like ShapeShift or Coinbase. But this comes at a price.
While there are community-driven solutions for wallets, third-party exchange services don’t have terribly efficient solutions. The companies who are making it convenient for you to exchange your tokens on their website are charging for it. When you purchase some tokens you aren’t really buying them from a person. You are buying them from this middleman who is willing to always store a certain amount of tokens based on demand in order to make the process instanting for you. How are they getting their cut if most of them are claiming zero commission, no exchange fee, and no service fee? They sell at a higher rate than the open market.
If you want to make the trade instantly, you will need this premium service. If you want to avoid this fee, you need to consider your options a bit more. Take CEX.IO for example. They offer both types of services; buying Bitcoin instantly comes with a 7% transaction fee, while trading on their market exchange will cost you only 0.25% per trade. In contrast, the same instant service is offered by Mercuryo with no increased rate and with a minimum commission. Big difference!
4. Exchange Fees
Going for an exchange must be the way, right? Well, there’s a catch. Not only are they charging a fee on every trade you make on their platform but, in most cases, they’re also taking a cut on each deposit or withdrawal. Exchanges are profitable businesses, as profitable as Binance, the biggest exchange by daily trading volume that raked in $446 million in 2018 alone. You might be tempted to follow the crowd and join the most popular option, but usually these companies are riding the popularity wave and their offer is not the best you can get.
Claiming no deposit fees can be reflected in bigger withdrawal fees. No withdrawal fees can bring higher trading fees. And small trading fees might be due to the increased deposit and withdrawal charges. There are many costs to take into consideration and the exchange strategy is usually to flash the apparently smaller ones and hide the non-competitive ones in the fine print.
Coinbase, the most popular choice for newcomers, charges an exchange fee as well as a network fee, and the card payment is as high as 3.99%. It might seem small in comparison with Coinmama, which charges 5% for the credit card payments, although Coinbase is available only to a few selected countries, while the latter is more widespread. Bitstamp can go as low as 2% for the same type of payment, if you are going to deposit more than $1,000. For less than that, it charges a fixed tax of $10. Definitely not your option if you’re going to invest a low amount.
In regard to the trading fees, Bittrex takes a fixed cut of 0.25% for every trade. Buying 1 BTC would result in paying 0.0025 BTC (~$8) as a fee. Might seem a fair price, anyway, compared with Binance (mentioned earlier) which has the same fixed rate, but with prices as low as 0.1% we’re beginning to understand how important is to make the right exchange choice. For the same trade, the fee will be 0.001 BTC (~$3). And the offer can become even better if you are considering paying the associated costs in BNB (Binance’s internal token), in which case the fees are reduced by 50% to 0.05%. Looking deeper, though, you’re going to realize that Binance has a pricey withdrawal system based on what tokens you’re taking out. For some tokens the fees are really cheap while for others are quite expensive. Bittrex, on the other hand, doesn’t charge to withdraw to another wallet. Only the network fee is applied. Needless to say, you need to take every aspect into consideration before making your choice.
5. Conversion Fees
What other charges are hidden in the great scheme of things? Conversion fees. If you deposit US dollars into an exchange that only accepts euros you will also need to pay a fee for converting your currency. How bad can the rate be? Well, Coinbase adds a spread of between 0 and 200 basis points (0–2%) to the exchange rate. That’s a lot!
If you’re going to cash out in the same account, you’re not going to lose money only once on the exchange rate. You’re going to lose money twice on it. And that’s on top of the requested fees. The service fees can’t be avoided, that’s the company’s imposed commission for using their platform, but the conversion fee can be handled on your part.
How to avoid paying extra fees
Now that you are aware of these hidden costs, we can get to the real question: how can you use this knowledge to avoid paying these fees or, at least, pay the lowest possible amount?
With the new ways of buying cryptocurrency becoming available each year, the offers become better and better. We’ve considered many options and ended up with three distinct ways for you to bypass all of the five stated costs.
- Peer-to-peer websites
Peer-to-peer exchanges make it easy for individuals to connect with each other without using the standard middleman. In this category, we’re including LocalBitcoins and LocalEthereum. There are no fees included, but the process is significantly more troublesome than using a cryptocurrency exchange platform. There are fewer users, it might take a while to find a seller, and once found you must be very careful because there’s no one to handle the transaction for you.
- Open-source solutions
We’ve already mentioned community-driven wallet projects, and we can add DEXs (decentralized exchanges) here. There are also many other projects that are being developed by talented people and their solutions come with absolutely no fees. There’s no catch. They are just cryptocurrency supporters willing to offer their work for free. The problem is, in most of these cases, the security. The lack of capital is reflected in the lack of testing and audits performed by established companies (who are charging quite a lot for their services). In order for these projects to take off, they need to earn the users’ trust first.
- New offers — Mercuryo
There’s no surprise that the best deals are coming from the companies who are new to the market. In order to compete with the giants that are leveraging their success, talented teams are willing to make use of blockchain technology. That’s Mercuryo, who was able to build a financial tool in the form of a mobile app that makes it possible to buy Bitcoin at the market rate with a minimum commission, instantly. Their wallet is tied to a card which can be also virtual, and they have all the legal groundwork covered as the other services previously mentioned. Additionally, the KYC (Know Your Customer) verification being requested only for investments above $1,000 making it quick and efficient for small investments or low amount purchases. That’s right, Mercuryo provides crypto acquiring services as well.
Therefore, to become a winner in the fast-shaping crypto market, a project needs to be honest and have its legal status in order. But that’s not the only requirement in today’s digital era where people are overwhelmed by partial solutions to their problems. What’s needed in crypto is a complete solution and, between the three, Mercuryo is coming the closest. We all know that spending your cryptocurrency can be a tough task between two parties, customer and merchant. MercuPay, their acquiring service, addresses the needs from both sides:
- As a merchant, you can integrate it as easy as adding a “Buy with Cryptocurrency” button on your website. MercuPay will automatically generate a unique wallet and an invoice for each purchase, plus the cryptocurrency will be converted for fiat money and sent to your account after a successful confirmation.
- As a customer, you only need to pay by scanning a QR code directly from your wallet. Everything after that is handled by MercuPay and the merchant as any other online purchase delivery. Want to test it out? Mercuryo already set up an online t-shirt store as a proof of concept.
Making a cryptocurrency investment, cashing out, spending your tokens; all these operations should be simple. There are many variables you should take into account when choosing a place to buy your cryptocurrency. As the competition ramps up and more projects are being developed, better and better offers will appear. But now you can take advantage of the options available today to lock in the best deals.
As long as you are always speaking to a financial advisor and you’re never investing more than you can afford to lose before making a major investment, the cryptocurrency game can be a profitable one for you!