Trading in the cryptocurrency market can be extremely lucrative if done correctly. You’ve probably heard the many stories of people buying coins at extremely low prices with little money and then see huge profits in a short period of time.
Many often wonder how much cryptocurrency exchanges really make with such high volumes of money being traded each day, and believe it or not there are some cryptocurrency exchanges out there who make more than a bank.
In Q1 of 2018, Deutsche Bank Germany’s biggest bank recorded a profit of $146 million. Binance one of the world's biggest exchanges recorded a profit of $200 million!
Since the beginning of the cryptocurrency hype in 2009, one thing has become clear –– there's a high-profit potential that comes with owning a crypto exchange.
Cryptocurrency exchanges are becoming one of the most profitable winners in the cryptocurrency boom, with exchanges generating millions of dollars in profit.
Cryptocurrency exchanges are very much like the stock market. You're able to exchange one digital asset for another based on the market value of the asset you're trading.
This is all done through an online platform known as an exchange. Some exchanges even allow you to trade with fiat currencies. Kraken supports currencies that include USD, CAD, GBP, and JYP.
How do exchanges work?
A cryptocurrency exchange is very similar to stock market trading apps such as Robinhood. These exchanges will list cryptocurrencies that you can buy. A buyer will need to fund their exchange account. You may be able to add local currency depending on the exchange, otherwise, you will need to use another cryptocurrency.
When someone places a buy or sell order, the exchange adds this to its 'order book'. The order book is a list containing the number of traders who want to sell that cryptocurrency and the prices they are looking for. The role of the exchange here is to act as the matchmaking service between the two.
Exchanges do not set prices, they act as intermediaries connecting buyers and sellers, with supply and demand being the dictator of the prices.
What are some of the best exchanges?
There are many exchanges out there that allow for you to trade digital assets, some trading at higher fees than others, but it's important to evaluate each one carefully.
First of all, you have to remember that not all exchanges will be listing some of the cryptocurrencies that you want to trade. Take XRP for example, it took Coinbase quite some time until they listed the digital asset.
Another option to consider when choosing your exchange is the security of your digital assets. If you plan to regularly trade cryptocurrencies then holding them on an exchange would be your only option. If, however, you are wanting to hold your asset for the long term then it may be worth storing them in a wallet. When you store crypto with an exchange the keys to your wallet are stored with the exchange, making you vulnerable to hacks, and trust me there are some horror stories out there!
The number of crypto holders who use wallets is also increasing each year. In Q2 of 2020, it was reported that there are just over 50 million crypto wallets.
(Source: Statista)
How does a cryptocurrency exchange earn money?
There are a number of ways in which an exchange can make money, but the majority of revenue earned by a cryptocurrency exchange is done through commissions. Exchanges charge a fee per trade, revenue is increased as the trading volume increases.
Exchanges will also charge a listing fee for a projects coin or token that wants to list on its platform.
Another way an exchange can make money is through what is called an initial exchange offering also known as IEO. An IEO allows other companies to organize token sales. In this context, an exchange serves as a repository for people to buy tokens before they go to an exchange. This is similar to crowdfunding platforms like Kickstarter. The contributor receives tokens in exchange for other digital assets such as BTC or ETH.
The exchange will make money by charging a percentage of the total proceeds as a fee. Depending on the final amount raised, such a percentage could yield a large payout for the hosting exchange.
As well as an IEO, exchanges can offer STOs (Security token offerings) and ICOs (initial coin offering).
(Source: Steempeak)
How can individuals invest in a cryptocurrency exchange?
You might be thinking about how lucrative it would be to own a crypto exchange, in which case meet Burstex.io.
Burstex is one of the first crowd owned cryptocurrency exchanges, who will distribute its profits among its shareholders. This means that even an ordinary person can own shares of a cryptocurrency exchange and be able to profit without the hassle of setting up their own exchange.
Over a period of time, this could see you earn a passive income each month!
As an alternative, the aforementioned Coinbase just announced that they're preparing to go public – which would make them the first US-based cryptocurrency exchange to do so. Once they get approval from the SEC, they're planning to make a direct stock offering that would allow investors to purchase shares of the business.
And the business is significant. At last estimate, Coinbase had a valuation of around $8 billion making their stock offering a rare opportunity to claim a stake in one of the world's biggest cryptocurrency exchanges.
But they're not the only options. For anyone who's looking for a way to earn some profits with an investment in a proven cryptocurrency exchange – but without getting involved with traditional stocks – there's a solution as well.
They can buy into the coming security token offering (STO) of the Gibraltar-based INX cryptocurrency exchange. The sale represents the first STO that has ever gained approval from the SEC. And considering that the funds raised will go toward expansion into the US market, there's a good chance of solid returns on any investment.
And if that's not enough, holders of shares in INX will qualify for a proportional share of 40% of the firm's annual cash earnings each year – making for an excellent income-producing investment
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Final points
- If you are thinking about trading cryptocurrency, consider what your plan may be to help you decide how much of your crypto should be stored in an exchange vs an offline wallet.
- Cryptocurrencies are never 100% safe when stored online since the keys to the wallet are stored with the exchange.
- Fees will vary across different exchanges, make sure you fully understand these before placing any trades.
The author has no vested interest in any of the projects or companies mentioned in this article.
Featured image licensed via contributor's Adobe Stock subscription (Open Studio / Adobe Stock)