Before we were graced with centralised crypto exchanges (CEXs) such as Binance, Coinbase, and Kraken, those looking to get their hands on digital currencies would’ve had to find someone to buy it from directly, or alternatively, had to mine it themselves. 

Source: https://www.binance.com/en-AU/feed/post/135415

Thankfully however, crypto adoption has catapulted over the past half a decade or so, meaning there’s a plethora of CEXs now out there to make our crypto trades that little simpler, safer, and seamless. 

In theory, it’s a harmonious cycle… CEXs improve, more crypto adoption takes place, which then gives CEXs even more room to improve. If not, then how else did crypto adoption skyrocket to 420+ million users in 2023 (Triple-A)? 

Source: https://triple-a.io/crypto-ownership-data/

With almost half a billion users in need of their services, CEXs have created numerous monetised tools for crypto traders. The beauty of these- for the CEXs that is- is that these tools offer certain rewards, as opposed to the risk-infused user trades in which they facilitate.

Here are 6 of the main ways CEXs make money:

1.  Commission & Withdrawal Fees

CEXs essentially serve as the middlemen between crypto buyers and sellers, meaning they make money through commissions on each transaction (traders also pay blockchain fees for each transaction called gas, however these don’t relate to CEXs). 

Whether you’re buying or selling, and whether it concerns spot or future trades, CEXs always take a cut, which is why commission and trading fees make up the vast majority of their yearly revenue. 

The popularity of an exchange can often dictate its fees, with assets listed, user count, and user-friendliness being indicators of this. For reference, CEX giant Coinbase has transaction and trading costs which range from 0.5% to 4.5% depending on the cryptocurrency, transaction size, and payment method. 

Depending on the CEX in question, its reach, and fee structure, crypto users can also incur fees when withdrawing funds to their wallets. On the odd occasion, they can also use CEX-branded crypto credit cards to purchase goods, which will often incur a small withdrawal fee. 

2.  Market Making 

CEX’s market making abilities generate revenue by facilitating optimal liquidity and seamless order execution. This function involves establishing quoted prices within a specific range, injecting additional liquidity, and preventing the emergence of price gaps. This, in turn, creates an environment where users can engage in markets where reciprocating buyers/sellers don’t even exist (as instead, the CEX serves as the respective buyer/seller). 

Intuitively, such mechanism encourages more users to engage in more trade activity, which therefore means more of the above revenue (i.e. commission fees) can be pocketed. 

3.  Token Launchpad Fees

Those wanting to list their tokens on popular CEXs must of course pay for such privilege. 

With the grandfather of crypto Bitcoin ($BTC) being a popular choice of digital barter, smaller CEXs often charge between 1-5 BTC for a token listing, whilst larger ones can charge upwards of 10 BTC. 

Here, mouth watering revenue can be made from special events called initial coin offerings (ICOs), where, like initial public offerings (IPOs), projects attempt to sell mass amounts of new coins to investors. Through facilitating these types of events, CEXs can demand fees in the millions of dollars. 

In continuing their money making ways, token companies can then pay for ad space on the CEX that they’ve launched on. 

4.  Loyalty Tokens 

Made most famous by Binance’s $BNB token, CEXs can make money through launching their own governing tokens that offer discounts on trades and other fees when used in transactions.

The purpose of a bespoke CEX token is to provide incentives for repeat customers, as traders are encouraged to trade (and continue to do so) by receiving token rewards for their activity. Not only does this dynamic also increase the trade activity of a CEX (and therefore its revenue), but it also gives traders a vested interest in the platform due to their automated ownership of its governance token.

5.  Margin Trading

Margin trading (a.k.a. leverage trading) allows CEX users to use borrowed funds to bet on the price of a crypto asset going up or down. This essentially allows CEXs to rake in interest from gains, as well as from liquidation fees when margin calls are missed.

Most crypto exchanges offer fixed fees based on the margin pair trading, which are usually a small percentage (0.01% or 0.02%) that they’ll pay once a position is opened. Interest rates for borrowed funds often work on a daily basis, with these ending once positions are closed. 

In the USA, only a few exchanges with a FinCEN Money Service Business licence can offer margin trading- and even if they do, only those with enough active users and capital for liquidity/reserve purposes can actually offer the service. 

6.  Services- Staking & Lending 

Staking is where users of an exchange lock their crypto assets for a set period of time in order to support the operation of a blockchain. Here, rewards are offered to long term ‘hodlers,’ with more on offer to those who commit their assets for longer. 

Although this is primarily a dynamic between holders and blockchains, CEXs take a cut of staking rewards due to their facilitation of the process. 

In crypto lending services, CEXs serve as the intermediaries that match lenders with borrowers to ensure a smooth execution of the process. As ever, crypto exchanges then make their money by taking a cut of the interest earned by the lender. 

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This article is intended for educational purposes and is not financial advice