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Beware the Hidden Fees

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A common refrain among people involved in the cryptocurrency space is how high the fees are. Investors, conditioned to $0 commissions on their stock transactions, see crypto fees as unjustifiably high. While this may seem like a reasonable complaint on the surface, it’s important to distinguish between explicit fees and “hidden” fees.  

 First, while your brokerage firm may not be charging you for your stock transactions, they are still generating revenue from you in hidden ways. They may be “selling” your volume to a separate exchange for a fee. Alternatively, they may just be capturing the spread on that trade with another client selling the same stock when you are buying it. Finally, they are likely loaning out the stocks in your account to hedge funds who want to lever up their portfolios, collecting the fees on the borrow. The point is, while your trade is nominally free, you are paying for that trade in other ways.  

How Hidden Fees Impact Buying and Selling Cryptocurrencies

 Let’s try to explain the concept in the real world. When you go on that fabulous vacation in Europe and pull out Euros from the ATM, or pay for that incredible meal in Tuscany with your credit card, you will likely be hit with two fees, one hidden and one not. First, your credit card will charge you a “translation fee,” which is usually ~3% of the value of your transaction, so if you pull out the equivalent of $100 in Euros, you will see a $3 charge on your account, but it won’t be a line item; it will be down at the bottom of your statement (n.b.- that is emailed to you, and you don’t read anyway) by the late fee section. While this is not really a hidden fee, you still have to hunt to find it.  

Spreads as Explained by the Grand Bazaar in Istanbul

 You will also “be charged” the bid-ask spread on the currencies. This spread is dependent on the “generosity” of your credit card company. If you’ve ever been to the most famous market in the world, the Grand Bazaar in Istanbul, and tried to change money, you will know all about the spread.  

 While the Wall Street Journal may quote the exchange rate as 8.69 Turkish Lira for 1 US Dollar, the money changer in the Grand Bazaar will offer to buy your dollars for 8 Lira. You can sell him back your Lira at a rate of 9.5. The point here is that if you give the money changer $1,000, he will provide you with 8,000 Lira and tell you to have a great vacation in Turkey. Then, when the tourist who is about to head back home comes up to him with 9,500 Lira, the money changer will give him $1,000. The money changer thus turned his 8,000 Lira into 9,500 Lira by capturing the spread on those trades with his new American friends.

 At least our Turkish money changer was honest about this trade; he told you straight up what his spread was. What if you go to your favorite crypto exchange, and they advertise how low their fees are; are they just great guys, effectively running a Crypto co-op? Remember, our Turkish money changer had a “No Fee” policy when we were trading with him. There was no 3% fee like the one our credit cards charge; there were no commissions; we simply had to pay him the spread, but what a spread it is. Our money changer will live well by simply living off that spread.  

How Cryptocurrency Exchanges Use Spreads to Charge Hidden Fees

 It might be easier to think about in terms of your friends at the exchange where you buy your crypto. Let’s say you did a search for the market price of BTC and found that it was $33,000 and decided that was a great price to either buy or sell. Well, you were happy when you saw the advertisement talking about how low their fees are. But, if your exchange has a 3% spread in either direction, you would actually be buying the BTC for $34,000, not $33,000, and, correspondingly, you would be selling it for $32,000.  

Remember, though, your exchange reminds you all over their website that you only pay a tiny fee on your trade, though that doesn’t really seem to be the case. Interestingly, one of the giant players in the industry, which, of course, touts its low fees, told investors on its earnings call that its spread in the latest quarter was ~3.5%. 

 It’s also important to remember that the spread they are talking about is on each trade, not the full spread. Put another way, in the scenario above, if you decided to buy BTC when your search told you the price was $33,000, you actually paid $34,000 because of the spread on the exchange. Unfortunately, the next day your car breaks down. You realize you need the BTC money for a new one, and because BTC is still trading for $33,000, you ask your good buddies at your exchange to sell your BTC for you and send you the funds. Well, the spread is $32,000, which stings because you paid $34,000 for your BTC and sold it for $32,000, even though the published price of BTC never changed.  

 What’s interesting is that the real spread on that exchange is 6%, but on their earnings call, they would tell their investors that their average spread per trade was only 3%. Regardless, that sure looks like a massive hidden fee, doesn’t it?

Final Thoughts: Beware the Hidden Fees

 The ultimate point is, it’s worth being vigilant when your crypto exchange advertises low/no fees for buying crypto. They may, in fact, only charge you a nominal fee for the trade, but at the same time, they may be raking in a massive spread. Alternatively, if another provider has what looks like a high fee but is only adding the fee to the actual market price that you searched for, you may, in reality, be better off.   

 It is worth doing the due diligence to check the fine print to be clear on the spread, the explicit fees, and the hidden fees to make sure you get the best deal for your crypto.

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