Crypto Trading Fees Explained: How to Optimize Transaction Costs

Spot trading fees usually apply to the most basic form of crypto trading, such as buying and selling of digital assets, especially for immediate ownership transfer. In spot trading, there is an order book which contains all the active orders, both buy and sell, submitted by various traders. This is where the buyers compete by offering higher bids as the sellers try to outperform each other by offering lower asking prices. At this point, the platform’s matching engine helps facilitate trades by pairing all compatible orders.

Investors who buy and sell cryptocurrencies should understand how these orders work because the method of execution has a direct impact on the amount of fees you will be required to pay.

Maker vs. Taker Fee Models

Most cryptocurrency exchanges use maker-taker pricing structures and other fee models. A maker is a crypto trader who places an order that will not be executed immediately. In most cases, this will happen when the trader uses limit orders at prices that are set far away from the current market level.

This order remains on the book as it waits for a matching order, and this adds depth and liquidity to the crypto market. Note that most crypto exchanges need deep order books to function well, and they usually reward makers with lower fees.

Unlike a maker, a taker wants orders to fill immediately at the best price. When a trader places one of the available market orders, the platform will instantly match it with existing orders. This instant execution usually interferes with liquidity in the market, and this is why takers pay higher fees.

The Bid-Ask Spread

The ask price is the lowest sell price a crypto seller is ready to accept, while the bid price is the highest amount the buyer is willing to pay for the digital asset. The difference between the ask and the bid price is the spread, and this could be one of the transaction costs that is often overlooked by many traders.

Even on platforms that promise zero trading charges in their fee schedules, you will still incur hidden costs through the spread.  If the spread widens, the hidden fees will go higher. Some of the aspects that can widen the spread include low trading volume, illiquid trading pairs, unstable market conditions, and very high volatility.

Trading Fee Example

The explanations above can be better understood through an example. Assume a trader buys 1 Bitcoin at $60,000. The platform charges the following structures for this Bitcoin purchase:

• Maker fees: 0.10%
• Taker fees: 0.20%

Let’s assume this trader runs this market order:

$60,000x 0.20% = $120

$120 becomes the total trading fee. But if the trader uses several limit orders, the fee will be:

$60,000 x 0.10% = $60

It is clear that when you change the trade execution style, you will cut down the cost by 50%. In over 200 trades, the taker will have paid a trading fee of $24,000 while the maker will have incurred $12,000 in total costs. In addition to immediate savings, tracking such costs carefully is important in terms of crypto tax reporting, in particular if you are a resident of a jurisdiction where cryptocurrency winnings are taxable. In US cryptocurrency tax, for example, the IRS allows you to include these as trading fees to your digital asset’s cost basis, which can help lower your capital gains liabilities.

As per the fees explained above, you can improve long-term performance by simply optimizing execution.

In spot markets, it’s about the ownership of digital assets, but when it comes to trading derivatives, you can speculate on price changes using leverage. However, it is worth noting that leverage can increase both risk exposure and potential profits. It also introduces a new category of fees that is not available in the regular spot trading fees.

Leverage Trading Funding and Financing Rates

Perpetual futures contracts are some of the most traded products in the crypto market. These futures contracts do not expire like their traditional counterparts. Therefore, the platforms use funding payments to make sure their prices remain aligned with the underlying spot market.

Financing rates are periodic transfers that happen typically every 1 to 8 hours between long and short positions. If the contracts start trading above the spot prices, long traders pay short traders, and vice versa. These funding charges may keep accumulating, especially when there are strong market trends across cryptocurrencies.

Margin Lending and Liquidation Penalties

Traders who are involved in margin trading also come across some extra costs when borrowing capital. This is because the platforms usually apply hourly or daily interest rates on the borrowed funds. This means larger position sizes coupled with longer holding periods can lead to very high total costs.

If the need for liquidation arises, especially when account equity falls below the standard maintenance margin requirements, the exchange charges a fee.

Some exchanges charge other non-trading fees, such as inactivity fees, which are applied to accounts that stay unused for many months or years. The following are the various ecosystem costs that can also lower your capital even when you’re not placing trades.

Deposit and Withdrawal Fees

Some exchanges allow free deposits, depending on the chosen payment method. But most of them impose withdrawal fees, and this also depends on the payment method used, be it bank transfer or wire transfer. When you move your assets from a platform to your private wallet, the exchange will charge network fees. This means frequent transfer of assets over time can reduce your capital. It is therefore advisable to compare withdrawal costs and exchange fees before picking a certain exchange.

Staking Fees and Opportunity Costs

You can generate income from crypto staking, but there are various costs involved. The costs come from delegation fees, network transaction fees, unbonding delays, and validator commission fees. There are also opportunity costs experienced during unbonding periods. The staking providers also retain a percentage of your earnings, which reduces your net income.

On-Chain Slippage and Gas Fees

Decentralized exchanges (DEXs) use liquidity pools and automated market makers. When you execute a swap on a DEX, you will pay slippage and gas fees. Slippage usually happens when the final price slightly differs from the price quoted during submission. Large trades can attract high slippage fees. On the other hand, the gas fee is the charge paid to the blockchain validators for processing transactions, and it can increase, especially as a result of network congestion, particularly on the Ethereum network. This is also used to confirm transactions on the blockchain.

Active traders can reduce the cost of transactions with the help of a few simple strategies discussed below. However, keep in mind that their effectiveness will depend on your trading frequency. For new traders who are beginning to buy and sell crypto, adopting these habits can help protect a starting bankroll from being drained with fees.

• Utilize Native Platform Utility Tokens: When you use native tokens like KCS on KuCoin and BNB on Binance, you can enjoy automatic discounts of up to 20% to 25% on all your trades.
• Pivot Completely to Limit Order Executions: Instead of using the exchange’s instant Buy or Sell buttons, use post-only limit orders. This way, your trade will not be executed immediately with higher fees, but will be added to the order book first. You can then qualify for lower maker fees, and reduce overall costs.
• Consolidate Volume on a Primary Venue: When you concentrate higher trading volumes on a single exchange, it becomes easy for you to climb the VIP tiers, which in turn unlocks lower fees.
• Route High-Volume Orders via Aggregators: If you have a high trading volume, you can use routing aggregators to split the orders across various liquidity pools to help cut down on the total costs for all your larger transactions.