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November 28, 2023

Cryptocurrency Trading: Types of Fees in Cryptocurrency Spot, Perpetual and Futures Trading

Understanding cryptocurrency fees can improve a trader’s profits in the long run. In the murky waters of crypto trading, learning about what eats into a trader’s bottom line can and will increase profits by reducing costs to one’s balance sheets, especially when the volume traded is of a considerable amount. 

Exchanges profit off these fees and that is how they keep operations running on a day-to-day basis to provide the best service possible to traders around the world. But how can you, as a trader, capitalize on these fees to heighten your performance?

The answer is by understanding the mechanism of these fees and how they are calculated in order to be aware of what you are charged.

Below we will delve into a slew of these fees:

  1. Liquidation Fees

Whenever a trader trades using leverage, especially in crypto derivatives, one is exposed to liquidation risk. This means that their margin in their respective accounts will have to be sufficient to cover for any considerable moves in price, against the trader’s taken position. One is then charged a liquidation fee if this price is hit and there is insufficient margin to cover the risk. Depending on the exchange, the fees can vary.

Ways to prevent incurring liquidation fees can include setting up stop-losses when trading, and also ensuring that margin is adequate while also being aware of how much risk you are allocating to a single position at any one time, respective to the % of the total margin, i.e., not more than 5% for any one trade.

  1. Staking Fees

When you stake some of your cryptos on an exchange or a lending platform that rewards you staking incentives, you are essentially loaning some of your funds via cryptos to the company involved, similar to deposits within a bank. Barring the regulatory differences and the fact that cryptocurrency staking garners higher yields for lenders, but also increased volatility and risk compared to TradFi institutions and mediums, more and more people are opting to allocate a small portion of their portfolio to these staking platforms.

A small % of these fees are collected for the platform to incentivize operations and to keep profits running from the staking incentives awarded to these institutional and retail lenders. These are known as “staking fees”.

  1. Withdrawals and Deposits Fees

This one is pretty straightforward. Users are charged a withdrawal and deposit fee every time they on-ramp or off-ramp onto some crypto exchanges. While some exchanges charge either the withdrawal or deposit fee, some opt to charge on both, depending on the business model of the crypto company themselves. 

This is because having third-party vendors connected to the exchange like MoonPay, Banxa, etc incurs costs for these exchanges while connecting them to more channels for transactions to flow through. Hence, depending on the volume of transactions and the charges of these individual vendors, the % charge will vary from country to country and also the day-to-day cost and profit margins of these operators, similar to MTOs (Money Transfer Operators) in TradFi.

  1. Trading Fees (Maker/Taker Fees)

This one can be a little confusing to new traders. “Makers” are people who add liquidity to the exchange - this can be in the form of market makers, or just traders who use limit orders to spur counterparties to take their orders. On the other side of the transaction are “Takers”, people who take liquidity from the market using market orders, thereby causing limit orders to get filled. 

Generally, makers pay lesser fees compared to takers as they provide liquidity to the market, hence exchanges usually find market makers and charge them a lower price for the volume they can bring to the market. Without market makers, liquidity will be sparse and no retail trader would be able to trade effectively on the exchange when spreads are high and fees are expensive due to inefficiencies in the liquidity provisions.

  1. Tiered Transaction Fees

Maker and taker fees can also be tiered into a fee schedule to incentivize makers and takers to do better in order to get lower maker and taker fees. Negative fees can also be used to reward market makers and top takers in order to improve their profit margins when conducting liquidity operations. Many exchanges use these fee schedules to incentivise retail traders as well. Stock brokers in TradFi do this too.

  1. Spread Fees

This is the opposite of Maker-Taker fees. If an exchange does not adopt the maker-taker model of doing business, then it will charge spreads fees.  The spread fee is determined by calculating the difference between the cost of a token, like BTC or ETH, and the amount a user either paid to buy it or was paid to sell it.

  1. Gas Fees

This type of fee is very prevalent in ethereum transactions. Because gas fees are generally more expensive in the ethereum network due to the way the protocol is constructed - gas fees thus refer to the fees required to conduct transactions or execute contracts on the Ethereum network to offset intrinsic monetary/time costs. It is compensating for the computing power used to process these interactions. Called “Gwei”, These fees are small fractions of Ether (ETH).

  1. Spot Fees

A spot trade takes place whenever a financial instrument changes hands and is paid for immediately. If you buy or sell cryptocurrency through a spot trade, you'll pay a spot fee to the exchange for facilitating the transaction. Spot trading is common in traditional finance: You can spot trade stocks, commodities and bonds, too.

  1. Funding Fees/Rates

Lastly, this is the most complex and misunderstood fee in the world of crypto. Though not as hard to grasp once traders get the hang of it, funding fees or funding rates refer to a small percentage of traders’ position value that they pay to (or receive from) traders on the other side of the trade. 

Generally, shorts pay longs if the trend is up, and longs pay shorts if the trend is down. Most exchanges use funding rate payment intervals of 1, 4, or 8 hours. This is because the market is usually in contango or in backwardation mode relative to the spot and futures price.

If the funding rate is negative, it is better to take a long position to receive the funding rate if that is your strategy, since dominant shorts pay long positions to keep their bets . Vice versa if the funding rate is positive.