How Do Commission Free Bitcoin Exchanges Make Money?

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In the early days of Bitcoin, there were very few exchanges available to buy and sell cryptocurrency. Mt. Gox was one of the first to take over the market, handing over 70% of all bitcoin transactions worldwide from 2013 – 2014.

Then, after years of hacks, controversy, and not to mention bankruptcy, the market was rife for new exchanges and digital wallets to take dominance.

After Mt. Gox, Coinbase was an early successor that offered ease for users to buy and sell cryptocurrency. However, in 2017, the crypto market exploded to new heights.

Cryptocurrencies across the board raised in value, users wanted to buy more than just the four digital coins that Coinbase carried, and the fluctuating prices even forced Coinbase to halt trading briefly by the end of the year.

The media frenzy and market attention led to competing exchanges looking for fast ways to offer better deals. So, how did they do it?

Commission-Free… Just Don’t Read The Fine Print

In January 2018, an online brokerage startup Robinhood announced they would introduce commission-free cryptocurrency trading into the market via Robinhood Crypto.

The announcement came on the heels of customer demand, and Robinhood execs seeing the opportunity for cryptocurrency to be an entry point for other financial services. After all, Robinhood was created to make the stock market more accessible to groups afraid of the cost-barrier. Why wouldn’t they use the same strategy for cryptocurrency?

On the surface, the promise of no high commission fees and its adoption of quick access to BTC and ETH is appealing. Plus, it’s a drastic difference from Coinbase that charges 1.5 – 4% fees for transactions.



In fact, many top exchanges and platforms have a similar fee structure as Coinbase. Kraken, for example, offers lower transaction fees but is not beginner-friendly and makes up for those lower fees with higher deposit fees.

Digital money platforms where you can move money instantly, like Uphold or Abra, charge lower fees overall and are transparent about how funds are reserved but don’t have the same “commission-free” lure of the newcomers.

However, there’s almost no transparency of how Robinhood Crypto, or any commission-free exchange, is making up for the loss: with hidden fees.

Robinhood Crypto’s revenue structure works in three different ways:

  1. Interest on funds in users’ accounts
  2. Paid subscription service for higher borrowing amounts
  3. Adding 1 – 5% to the value of cryptocurrency during trading

So, “commission-free” actually means that the revenue is distributed in other ways that users can’t always see. What’s more, an exchange like Robinhood Crypto encourages you to borrow money in order to fund your wallet.

This is just one example. Robinhood Crypto isn’t the only exchange using a misleading marketing promise in order to meet customer demand. Circle Invest also promises no fees, but uses a similar “exchange-spread” strategy to add an additional fee to the real cryptocurrency value during trading.

In other words, Circle Invest offers an unfavorable quoted price compared to the actual price of BTC at the time of exchange. As an article from 99Bitcoins revealed:

“When you buy [b]itcoins with Circle you won’t pay a fee but it seems that [on] Circle $500 doesn’t come up as $500 worth of [b]itcoins. It seems that Circle doesn’t guarantee the exchange rate at the time of placing the order (unlike [exchanges with fees]). This can cause a difference in how much you pay.”

This was before December 2016, when Circle removed the ability to buy and sell bitcoin on its platform. The same strategy though applies as its moved it’s cryptocurrency market over to Circle Invest, Circle’s latest cryptocurrency mobile app. For example, the value of Ethereum may be a price of $500 across exchanges. However, on a “comission-free” exchange you would be charged $505 to buy or $495 to sell. Why? So the exchange can make up the difference.

Other exchanges and digital money platforms have started to pay attention, as they stick to traditional structures of upfront fees and guarantee the value of cryptocurrency at the time you buy it.

When you buy a cryptocurrency on Circle Invest, you’re not actually buying it at the value it’s currently trading at—there is a hidden fee built into your transaction, so you’re paying more for that cryptocurrency. So, from the customer’s perspective, you may think it’s a free platform, but it’s really not.

Buy Bitcoin Now, Transfer Never

Still, consumers are drawn to these new, exciting exchanges for more than just the “zero fee” sticker on the front page of their website. The ease of buying, especially with exchanges that have integrated apps like both Circle and Cash by Square, has challenged the industry to grow beyond one central exchange platform.

However, what some of these exchanges and digital wallet apps don’t explain, is that you can’t really do anything with your cryptocurrency beyond buying and selling within the app.

Which means, you can’t use your bitcoin as currency. There’s no function to take your bitcoin out of the app, or on the other hand bring cryptocurrency into it.

These exchanges, simply, treat cryptocurrency as an investment opportunity with no flexibility. You can’t use the money for transactional purposes. You can’t send someone else bitcoin, or pay for a purchase with bitcoin. Right now, all you can do is hold that bitcoin.

Which, in that case, do you even own it?

Transparent and Reliable Exchanges Exist

There are over 190 cryptocurrency exchanges to choose from, and with so much competition it’s no surprise that companies are doing everything they can to attract customers.

The fact is Coinbase isn’t the only option—nor should it be the only option. There are a few key features of a reliable exchange that can make sure you protect your funds and have a good relationship with the platform:

  • Transparent policies and fees
  • Strong reputation
  • Security
  • High volume
  • High price accuracy

Of the listed exchanges, the most reliable exchanges or wallets offer a diverse mix of traditional and cryptocurrencies. While many come with fees there are alternative options that have fees that are notably lower and are transparent about the exact costs of transactions. That level of transparency goes a long way for consumers, especially when so many of these other digital wallets leverage insidious hidden fees.

As consumers, it’s critical to do some homework, look at fee structures, weigh the available cryptocurrencies and ultimately decide which exchange offers the most practical value. The key to remember is that if an offer sounds too good to be true, it just might be.

Page Updated: May 30, 2018

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