Revenue generated by crypto exchanges depends on several factors, including income and their expected operational expenses. However, every platform has several steady revenue streams, helping the protocol persist even during periods of market turbulence. Below we list the primary sources of income for crypto exchanges.
The main source of income for every exchange are trading fees. Each trade consists of two parts (opening and closing a trade). On average, platforms charge a commission of 0.1% for each side of the transaction, yet if an external processor does the execution, the exchange takes only one part of the commission.
For exchanges to generate steady income, they must create network conditions that incentivize trading by offering market makers of allowing bot trading. The exchange generates commissions when individual platform transactions are high, regardless of the total trading volume.
Running a crypto exchange is a business, and every project needs to be added to an exchange to showcase investors’ trust. However, exchanges place a price tag on every project listing, which can average between $2 million and $5 million. While listing prices on established exchanges might be high, they come with additional benefits. After listings, token prices tend to skyrocket while projects gain access to new investors and new liquidity streams.
IEO, or Initial Exchange Offering
IEOs are more trusted token crowdfunding processes because crypto exchanges take the role of gatekeepers. In addition, because exchanges have a global reputation they must guard, they are less likely to promote scams that increase investors’ trust in both platforms and upcoming projects.
In addition, an exchange can change for an IEO a fee ranging from tens of thousands to even millions for supporting the token sale. An IEO also comes with additional marketing, legal and technical advice, and expertise.
OTC, or Over-The-Counter process
Exchanges differentiate between retail and institutional trading. By offering a superior service, exchanges allow larger investors to trade outside of the public eye. As a result, the OTC is preferred by fund managers, institutional investors, and even miners who want to trade bigger sums without the fear of affecting the public trading price. The OTC process entails a minimum order size is needed for participants to be able to trade.
Markups allow a crypto exchange to stay afloat by providing uninterrupted trading. Software is implemented to prevent arbitrage situations if the platform aggregates liquidity. Thus, markups help platforms manage bid/ask price fluctuations by creating a system where the exchange profits from the spread between the original price and the processed price.
Exchanges also generate income through leverage trading, a form of short-term loan provided to traders. Then an exchange acts as a broker, increasing the number of trading instruments. However, proper risk management must be implemented, and exchanges often use a hybrid business model to generate revenue from every client type. While providing higher leverage is beneficial for traders and exchanges, they can incur significant losses if not managed correctly.
Soft-FX offers great crypto exchange solutions and can advise you to implement the most profitable business model.