How do commission-free exchanges make money?

The number of cryptocurrency exchanges has exploded since the Mt. Gox days. They were one of the first big digital currency exchanges, handling 70 percent of global Bitcoin transactions in 2014.

However, Mt. Gox fell to hacks and controversy, opening up a new pipeline of crypto-clients for new exchanges. Fast forward just four short years and the number of exchanges is in the hundreds.

Coinbase has been a steady force in the crypto-space. But as the number of available digital coins rise, people want more than the four lonely, run-of-the-mill coins on Coinbase. There have been rumors of Coinbase adding Ripple, but nothing has happened thus far.

The rise of cryptocurrency value and the number of digital coins on the market has caused an unprecedented boom of exchanges. This has made competition fierce among them, opening the door for commission-free exchanges.

Commission-free exchanges can capitalize on a relatively high commission-based marketplace. How do they work? How do they make money? Is it really commission free? Let’s take a deeper look.

Commission-Free Exchanges May Not Be Completely Transparent

Cryptocurrency and blockchain technology is all about transparency. Commission-free exchanges may not be completely transparent. No fee transactions sound great, but fees may be hidden elsewhere.

Earlier this year, Robinhood, a brokerage startup launched commission-free crypto trading via Robinhood Crypto. Robinhood was all about making the stock market accessible, and moving into the crypto market made sense.

They made Bitcoin and Ethereum easily accessible with no commission fees. This separated them from Coinbase, an exchange with transaction fees ranging from 1.5 percent to four percent. However, the lack of transparency is concerning. How is Robinhood recouping the costs of no fees?

Turns out that Robinhood Crypto’s revenue structure is a bit shadowy. For instance, they charge interest on user account funds, users need to pay for premium access, and digital coins have an added percentage, as high as five percent, during trading.

Digging a little deeper and you’ll find that commission-free is associated with other revenue distribution tactics users just don’t see. This lack of transparency supports an unfair promise, and they are not the only exchange using this “No Fees” tactic.

Circle Invest Uses Built-In Fees on Transaction

Another exchange that boasts commission-free trading and transactions is Circle Invest. However, they are recouping costs by adding percentage fees to the cryptocurrency value.

For example, if you use Circle Invest to purchase Bitcoin, you are not making purchases at market value. Instead, you are buying Bitcoin at a percentage markup. If Bitcoin is say $9,000 during the time of purchase, you may be paying $9,200 with Circle Invest.

“Indeed when you buy Bitcoins with Circle you won’t pay a fee but it seems that circle $500 don’t come up as $500 worth of Bitcoins,” Ofir Beigel of 99Bitcoins explained. “It seems that Circle doesn’t guarantee the exchange rate at the time of placing the order.”

If you think the big name exchanges are better, think again. In fact, there have been issues with Coinbase users having their transactions cancelled. The cancelled transactions are conveniently aligned with spikes in the crypto market.

Commission-Free Exchanges Offer Limited Flexibility

Cryptocurrency enthusiasts will continue to be lured in by commission-free promises. There are other baited promises used by exchanges to pad member numbers, like flexible, easy trading.

For instance, by promoting the integrated app of an exchange builds upon that easy, anytime and anywhere trading. Circle Invest and Cash by Square both do this. Unfortunately, those integrated apps are nothing different than the desktop platform. Most users can either buy or sell, that’s about it.

Transparency and Flexibility Trumps Commission-Free Option

Doing your due diligence and not falling victim to commission-free and integrated app promotional hype is the first step to securing a cryptocurrency exchange that works for you. The competition is fierce among exchanges, and they’ll be slightly less transparent to secure your membership.

When looking for a transparent exchange that works for you, keep these essential elements in mind:

  • The exchange is very transparent about fees and policies
  • They have a stellar reputation in the industry
  • The exchange is security conscious for both themselves and users
  • They have a wide range of cryptocurrency and fiat currency to choose from
  • You are buying and selling digital coins at current market value

Choosing an exchange or digital wallet platform doesn’t have to be challenging. There are a number of alternative options with lower fees and high levels of transparency.

Large exchanges, like Coinbase, and their four lonely digital coins is also not you’re only option. There is nothing more tedious than needing multiple exchanges to buy and sell the digital currency you want.

You want to have a robust cryptocurrency portfolio. You also want the control to do what you want with your digital coins or fiat currency, when you want. Remember, not all exchanges and digital wallets are created equal. Do your homework and ensure your funds are in capable hands.

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