Irrespective of what you desire to invest in, buying and holding can be a good long-term investment strategy.
This is true for cryptocurrencies just as much as it is true for any other tradable asset. It’s critical to understand why this works because once you do, you’ll be able to improve your gains and reduce your losses by paying less in trading costs, either through lower turnover or by taking into account the exchange you use.
Fees are indeed an extremely significant part of trading cryptocurrency, and it’s unlikely you’ll interact with a public blockchain without encountering some. Despite their prevalence, they are often misunderstood.
There are two types of fees you are most likely to encounter while trading in crypto.
- Network fees
- Exchange fees.
The first type of fee when trading crypto on decentralized exchanges is network fees, more commonly known as gas. They are the market price for actually confirming the transaction on the blockchain, rather than being set unilaterally by an exchange. They are determined and paid for by the network’s miner/validator/etc.
In a Proof-of-Work system, for example, miners are recompensed for the cost of electricity and processing power, whereas in a Proof-of-Stake system, they are rewarded for staking their crypto holdings.
Network fees vary from one provider to the next. To put this in context, the average network transaction fee on Ethereum was around $150 USD in early January, but has now floated around $120 USD for the entire months of March and April. The average network transaction fee for Bitcoin was around $148 USD in January and has remained around $139 USD in April.
Because these are market rates for networks, they are heavily influenced by demand. Fees may rise if the network becomes congested. Furthermore, miners often seem to include transactions with higher network fees into blocks sooner because it increases their profit. This could be a problem in the system if miner centralization occurs, but it is beyond the scope of this article.
In general, users are allowed to set the transaction fee they are willing and able to pay for their transactions. If you are undecided, the exchange will set fees for a user at the prevalent market rate.
Cryptocurrency exchanges generate revenue by charging a fee for each trade executed on their platform. They will almost always charge for deposits and almost always for withdrawals in most cases. This is a whole lot of money.
There are two terms to be conscious of under this framework: Maker and Taker. A Maker is a trader who initiates a new trade on a trading platform. A Taker is a trader who matches the trade of a maker. Fees for each of them may differ.
It’s worth noting that, for a variety of reasons, very few true DEXs charge trading fees. One reason is that many DEXs are still new in the crypto space and want to urge people to use their platform, which charging no fees may achieve. DEXs can also have lower operating costs. This adds to what distinguishes them from centralized exchanges, and it’s beneficial to do your research here to ensure you get the best deal.
The High Costs in Crypto Trading
This is an important topic to keep in mind because trading costs for crypto assets are comparatively higher than the trading costs for popular stocks and shares. This shouldn’t be shocking news for a novel market like crypto trading, and costs have been and may continue to fall. Notwithstanding, frequent trading can be costly, converting gains in the underpinning currency into a trading loss. Low turnover approaches are generally advisable, all else being equal, and given the higher trading costs, this is especially true of cryptocurrency.
Truly, the tremendous price rise in many forms of cryptocurrencies in recent years has made relatively high trading costs a negligible amount, but if future returns are lower or negative, the high costs of turnover will become more increasingly obvious. This means you should think about your trading costs and trade less if possible. Both strategies have the potential to reduce the amount of money that fees take out of your profits.
How to Minimize Costs in Crypto Trading?
Believe it or not, crypto fees are eating deep into your portfolio. High fees can amount to something substantial when cumulatively assessed. These crypto fees may seem small at first, but are they really that small?
Here are some practical ways to minimize costs while trading crypto.
- Buy Crypto with Coins
When you convert cryptocurrency to fiat — government-backed currency — you will almost certainly be charged fees for both the withdrawal and the deposit into your virtual wallet. Using coins to trade, on the other hand, won’t attract any charges mostly. Consider implementing this strategy to reduce or eliminate your cryptocurrency fees.
- Trade during Less Congested Periods of the Day
Demand will always increase the price of services. During very congested periods of the day, miners usually have a lot of transactions to confirm, thus giving them the leverage to charge higher gas fees for traders who desire quicker transactions.
The financial world sleeps at certain periods of the day and so does the crypto-verse. Observations have shown that there are lesser numbers of transactions between 4-7am UTC and network fees will be affordably low. This will help minimize costs on network fees.
- Choose Your Transaction Types Wisely
You may wish to exit a cryptocurrency investment, but do you require fiat currency from that transaction? If you don’t, you may be able to exit that cryptocurrency holding with minimal fees by exchanging it for another cryptocurrency investment. Deposits into your digital wallet may be charged on some crypto exchanges, and conversion fees from cryptocurrency to fiat currency may also apply. For example, when converting Ripple to fiat, the Ripple price AUD may greatly influence the conversion fees of that transaction.
You’d think that a busy crypto trader who makes a lot of trades every day would be concerned about fees. They may appear to be insignificant at first, but they can quickly reduce your profits over time, especially with small portfolios. Small investors may be less likely to enter or actively participate in the market as a result of this stumbling block.
Consequently, it is up to the user to determine what fees they believe are reasonable and to act appropriately.