Zero fee exchanges sound too good to be true because they are. You may not have specific fees itemized on a transaction, but you better believe you are paying for the exchange’s services. Our in-depth look at zero fee exchanges will explain how these exchanges work.
There Ain’t No Such Thing As a Free Trade
The word “free” sounds appealing and that’s why exchanges and trading platforms like to use it. Free is always good marketing. Telling users they can deposit, withdraw and trade without having to pay anything extra makes them more likely to sign up.
The devil is in the fine print
Crypto exchanges are businesses with employees, servers and all the other expenses required to keep the business running. The money must come from somewhere– and that somewhere is you.
Fortunately, this isn’t a case like Facebook or Google where the users are the products. Crypto exchanges are not using your personal information to sell advertising. Instead, they simply structure their fees in ways that you can’t see them.
As Walt Bettinger, the CEO of online brokerage Charles Schwab told S&P Global Marketplace: “If someone offers trading at a $0 commission price then they’re simply making it up in other manners. To say you’re doing a trade for free is just disingenuous.”
He was talking about stock trading, but it’s no less true for crypto trading.
Exchange rate spreads
Zero fee exchanges’ most common revenue sources are exchange rate spreads. The spread is the difference between the quoted selling price and the quoted buying price — a common feature of foreign exchanges in the fiat world. Whenever you exchange money in another country, the exchange counter makes its money through the exchange rate spreads it sets.
Since the numbers are easier to read, let’s first use a fiat example based on data from CNN. Let’s say that you have flown from the United States to Dubai. The foreign exchange counter may quote a price of the United Arab Emirates currency, the dirham, as 1 AED = 0.19054 USD / 0.35386 USD. The second dollar amount is the price to buy dirhams with US dollars. The first dollar amount is the price to sell dirhams for dollars.
Let’s say that you want to buy 100 dirhams. At an exchange rate of 0.35386 USD per AED, you would have to pay $35.39. At the end of your visit, you still have that 100 dirhams in your wallet. Assuming the prices are the same, you would have to use the 0.19054 USD per AED rate to sell your dirhams for dollars and get $19.05 back. The $16.34 difference is the spread the foreign exchange counter charges. This is why you should never use the airport exchange counters.
The same thing happens on “no fee” crypto exchanges. Let’s say that you want to use ShapeShift to buy ether with bitcoin. At ShapeShift’s quoted exchange rate, you would have received 31.7858971 ETH. If you had simultaneously traded 31.7858971 ETH for bitcoins, though, you would only have received 0.9860001 BTC back. When you adjust for the mining fees on the Bitcoin and Ethereum networks, the spread is .01374530 BTC.
A spread isn’t the only way “no fee” exchanges make money from your business. Canada’s Coinberry exchange doesn’t just include a spread in its exchange rates, it also adjusts the fee based on the size of the trade. Other exchanges, such as Cobinhood, prefer not to deal with banks and credit card processors directly so they outsource those features to third parties like Epay or Simplex. The exchange may not have any fees, but those third parties sure do.
No, it isn’t a scam
Transparency has always been an issue in the crypto world, but the spreads that no-fee companies embed into their exchange rates aren’t evil. Not having to see the fees listed separately gives users one less thing to worry about when exchanging crypto.
Zero fee exchanges also tend to operate on low-cost business models. When you do the math, their spreads may cost less than many advanced exchanges.
Some Zero Fee Exchanges
Here are several exchanges and trading platforms that sell themselves on being fee-free. You will still end up paying for these companies’ services through exchange rate spreads or other fees.
Taiwan-based Cobinhood opened its doors just as bitcoin prices were peaking at the end of 2017. The company promotes itself as a zero fee exchange, but there is a lot of small print involved.
Technically, deposits and withdrawals are free. You do get charged network fees on crypto withdrawals, but none of that goes to Cobinhood. The real catch comes when you transfer fiat in and out of the exchange. Cobinhood does not handle fiat transactions directly. Instead, you must deposit your cash (US dollars only) into an Epay account.
Even though Cobinhood does not charge fees, Epay does. Transfers between Epay and Cobinhood are free. Wire transfer deposits from a bank into Epay are free, but withdrawals will cost the greater of $5 USD or 1%.
Other restrictions: Residents of Japan, Taiwan and the United States cannot use Cobinhood.
Founded in 2014, ShapeShift is an American trading platform that supports 54 cryptocurrencies. Since it is non-custodial, ShapeShift does not have deposit or withdrawal fees. The trading platform does not charge trading fees either, with the exception of each currency’s network fees.
“We try to earn revenue by offering a profitable exchange rate,” ShapeShift explains on its support site, “and typically we earn in the range of 0.5%.” In a description of its exchange rates, ShapeShift further explains “We earn a profit to the extent we can source coins in other markets for a lower cost to replenish our reserves.”
Other restrictions: Although ShapeShift has 54 coins on its listing, it restricts customers’ access to certain coins based on where they live. Americans, for example, can only trade 35 cryptocurrencies.
Abra is a decentralized trading platform that lets you exchange 54 fiat currencies and 28 cryptocurrencies directly from the Abra wallet app.
Most deposit and withdrawal options are fee-free. The exceptions are American Express purchases (limited to US customers), transactions with human “tellers” in the Philippines, and credit or debit card purchases made through Abra’s integration of the Simplex and Coinify services.
Abra once charged trading fees, but suspended trading fees in February as part of a 2-week promotion. Things went so well that Abra extended the promotion “indefinitely”. The company does explain that it makes money through exchange rate spreads.
Other restrictions: Abra is a global platform, but only supports fiat bank transfers in the United States and the Philippines. Users from anywhere else can use Simplex to make credit or debit card purchases, but will get exposed to fees for exchanging from their local fiat to US dollars.
Although Abra supports trades between 82 currencies, the platform only operates natively with bitcoin, bitcoin cash and litecoin. These are the only cryptocurrencies you can deposit into or withdraw from the Abra wallet. If you buy dash inside the app, you must convert it to one of the native coins before making a withdrawal.
Founded in 2014, this Adelaide-based service Hardblock only supports bitcoin trades with the Australian dollar. The company’s FAQ page explains that it does not charge any additional fees on trades, but does profit from the spread between the bitcoin buy and sell prices.
Toronto’s Coinberry lets you buy and sell two cryptocurrencies: bitcoin and ether. Its tagline is “Goodbye fees, hello commission-free trading,” but that isn’t quite the case.
When you look at Coinberry’s own fee schedule, the trading section says “Dynamic, included in quoted price.” Since this is a fee schedule, a complete sentence would say “Trading fees are dynamic and are included in the quoted price.” The fine print explains Coinberry’s trading fees further:
“Our trading fee is a combination of a number of factors, including: order size, exchange fee, mining fee for the crypto currency (i.e. gas) and a small spread for our services. Our algorithm crunches all the numbers for you to get the absolute best price.”
BuyBitcoinCanada is an online bitcoin sales service run by Bitcoin ATM maker BitAccess. As long as Canadians link their bank accounts to BuyBitcoinCanada to make direct debit purchases, they will not have any trading fees.
Robinhood (United States)
Robinhood is a traditional online equities brokerage launched in the United States 5 years ago. In early 2018, the company added a cryptocurrency service to its offerings and now supports trading in 6 cryptocurrencies. However, America’s fragmented regulatory system limits access to Robinhood Crypto to residents of only 19 states.
The company does not charge for deposits, withdrawals or trades. Robinhood’s revenue comes from its equities services, where it charges interest on money loaned to margin traders. In addition, Robinhood earns interest on the cash and stocks it holds for its customers.
Other restrictions: Robinhood hasn’t fully committed yet to being a crypto exchange. You cannot withdraw your crypto from your Robinhood wallet. Robinhood won’t even accept crypto deposits for fear the coins could be “proceeds from illegal activity.”