Planning to invest in cryptocurrency? You should know about these three types of transaction fees

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Cryptocurrency exchange, as the name suggests, is a platform where you can trade between cryptocurrencies based on their current market value. The value of crypto currencies is determined by the demand, the supply and market. It is very similar to a stock exchange where you buy and sell shares of companies. On a cryptocurrency exchange you buy cryptocurrency at a certain price and you sell it when the price increases to make a profit, it is based on the fundamental principle of entering the market and exiting at the right time. Similar to a stock exchange, cryptocurrency exchange also involves transaction charges on the trades done by the trader. In this article, we will explain trading fees levied by cryptocurrency exchanges.

If you are planning to invest in crypto, you should be aware that there are broadly three types of transaction fees involved in crypto trading:

Exchange fees: While trading in cryptocurrency, the first transaction fee that a trader need to be aware of is the exchange fee. Exchange fee is the amount charged by the cryptocurrency exchange to complete a buy or sell order. In India, most of the cryptocurrency exchanges have a fixed fee model but the final cost of transaction depends on the platform you are using to complete the transaction. As a smart trader, you should do good research and find out which crypto exchanges offer lowest transaction fees.

Maker-Taker fee model also exists within crypto exchanges. The maker is the seller of cryptocurrency and taker is the buyer of crypto currency, this model charges a variable fee depending on your amount of trading activity. If you are an active trader or you have transacted a high value over a longer rolling period, you may qualify (as a maker) for a reduced transaction fee. The fees structure under this model is different for centralized and decentralized exchanges.

The exchange fee is the primary source of revenue for the exchanges and forms an integral part of their business model.

Network fees: Network fee is payable to the cryptocurrency miners for the work they do. Cryptocurrency miners are individuals with powerful computers which are dedicated to verifying and validating transactions to be added to a blockchain. In a nutshell, they play an important part in crypto transactions by ensuring that tokens weren’t spent twice and transactions are real and true. The cryptocurrency exchange has no direct control over the network fees and it is payable to the miners/validator of the network. Network fees are driven by demand, when the network becomes crowded, fees may increase. Users are normally allowed to pre-set the transaction fee they are willing to pay for their transactions when they are using a third party wallet but while they are using exchange, it is setup automatically by exchanges itself to avoid any kind of delay in transfers.

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The time taken for the validation of such transactions can vary by network as it depends on miners deciding their own fee and Users choosing whether to accept or not the fee setup by the miners. So the time taken for validating a transaction is inversely proportional to the transaction fee User is willing to pay. Users who are willing to pay the network fee setup by the miners, will see their transactions getting validated quickly. It is important to note that miners are not free loaders but get paid for the electricity cost and vast processing power.

Wallet fees: While trading in cryptocurrency, you store your cryptocurrency in a digital wallet. Digital wallet is like an online bank account where you keep your cryptocurrency safe. The crypto wallet enables you to receive cryptocurrency and store them safely and makes it easier for you to use your cryptocurrency or send to others. Most of the wallets don’t charge any fee on deposits and storage of cryptocurrency but charge a fee on withdrawing/sending cryptocurrency from the wallet which is basically network fees. Crypto wallets offer systematic cryptocurrency buying options and have integrated merchant gateway service through which you can even recharge your smartphones and DTH services.

Most exchanges provide an in-Built wallet functionality where users can store all their crypto at one place and no fees are charged for storing and depositing in the wallet.

Transaction fees and charges are an important part of the financial/investment services sector. The funds collected through such transaction charges are crucial for companies which enable the traders and institutions to invest in cryptocurrency from the comfort of their home through their platform. Every investment service has a team of dedicated professionals working behind the scenes to provide seamless investment experience to the traders and institutions 24×7, 7 days a week and 365 days a year. Cryptocurrency based products and services are capable of providing sustainable economic growth. Cryptocurrency is entering the investment portfolio of Indians very quickly and will emerge as the most secure & lucrative asset class of the 21st century.

(By Shivam Thakral, CEO, BuyUcoin)

(The suggestions/recommendations around cryptocurrencies in this story are by the author. Financial Express Online does not bear any responsibility for their advice. Please consult your financial advisor before dealing/investing in cryptocurrencies.)