Cryptocurrencies are supposed to make the U.S. dollar obsolete. But this year’s crypto trading craze means companies that help investors buy and sell digital currency have been raking those old-fashioned greenbacks in.
The total value of the cryptocurrency market more-than tripled in less than six months, and briefly surpassed $2.5 trillion in May, according to figures from CoinMarketCap. As a wave of new crypto traders and investors hopped aboard the fast-moving bandwagon, they left behind a trail worth billions in revenue for the companies where the digital coins were being swapped.
Robinhood may offer commission-free trading, but the online broker makes a windfall off these transactions by selling data to high-frequency trading firms. In the first quarter, Robinhood generated nearly $88 million in revenue from its cryptocurrency business, the company disclosed in its initial public offering (IPO) filing with the U.S. Securities and Exchange Commission earlier this month. And 34% of that total came from Dogecoin, the coin created originally as a joke that’s now among the Top. 10 biggest cryptocurrencies.
Coinbase is generating average net revenue of $34 to $45 each month off its 6.1 million retail customers that are making transactions — or the equivalent of as much as $540 each year, the company disclosed in its most-recent earnings statement. By comparison, a low-cost index fund that tracks a benchmark like the S&P 500 might charge $3 a year for every $10,000 invested.
What’s clear is that companies are profiting — either directly from trading fees or indirectly by selling data — as people try to chase the hottest crypto currency to the moon, and hope it doesn’t land with a dud. “The velocity of money is much higher on planet crypto,” notes Matthew Sigel, head of digital assets research for VanEck. “Fees can add up for active traders.”
Here’s how to keep your crypto trading fees from getting out of this world.
How to keep crypto trading fees low
Crypto trading still is relatively new since Bitcoin only came on the scene just over a decade ago. As a result, there’s not yet an industry standard for how brokers are passing along the related fees. Robinhood’s zero-commission model has come under scrutiny, especially as the company prepares for its upcoming IPO.
Fees vary widely even among the crypto-focused brokers — and are often a bit confusing. Both Coinbase and Gemini charge a 0.5% spread (or convenience fee) on all transactions, plus fees that start at $0.99, depending on the size of the transaction.
But the fees you actually pay usually represent a percentage of the total purchase amount — and could be as high as 1.5% at Coinbase, notes Justin Barlow, a research analyst at The Tie, an information services provider for digital assets. While fees for crypto trades are generally higher than in other markets, there are ways to reduce them.
Barlow offers four ideas:
- Opt for decentralized exchanges. These exchanges cut out any “middle man,” allowing for peer-to-peer crypto swaps, and they offer low fees (beyond transaction fees). Examples include Uniswap and PancakeSwap, which charge flat fees of 0.3% and 0.25%, respectively.
- Find centralized exchanges with lower fees. These exchanges do use that “middle man,” but some — like FTX US — have lower fees than Coinbase.
- Sign up for “pro” accounts, if eligible. Coinbase Pro charges fees that are a fraction of what standard users will pay.
- Hold coins that offer a trading discount. Binance.US offers customers a 25% discount on spot trades if they hold the company’s binance coin in their account.
Alternative low cost ways to bet on crypto
Buying virtual coins directly isn’t the only way to participate in the broader crypto universe. Options include investing in funds that track the coins themselves, investing in funds that track the industry, or buying shares of specific stocks.
You can invest in funds that hold bitcoin and other big cryptocurrencies, and may offer more diversification benefits and lower fees. Invictus Capital has an index fund that tracks the top 20 cryptocurrencies and charges a 0.5% management fee. That amount is comparable to, if not lower than, many mutual funds.
Within the stock market, there are exchange-traded funds (ETFs) that track companies that stand to benefit from cryptocurrency trading or blockchain technology. Two of the largest examples of each — a blockchain fund from Amplify Investments and a crypto-focused fund from Exchange Traded Concepts — have expense ratios of 0.85% and 0.71%, respectively. That works out to as high as $85 a year in fees.
Finally, some stock market investors have bought shares of Coinbase as a proxy for the cryptocurrency market since the stock debuted in April, and others may look to Robinhood as a similar bet. While buying stocks is free at most brokers now, it does increase risk (not to say that cryptocurrencies don’t).
If you have your heart set on cryptocurrencies, however, expect that more competition may drive fees lower ahead. “Assuming a competitive market – which crypto most definitely is – the price of a blockchain transaction should eventually fall somewhere close to the cost of the computing power required to execute it,” Sigel says.