With so many Bitcoin exchanges emerging in the last two years, it can get quite confusing knowing where to get your Bitcoins. Most people do “the obvious thing” which is to compare the different Bitcoin exchanges based on the exchange rate and then usually go with the cheapest one.
The problem is that the exchange rate is only part of the equation, and sometimes a very small part of it. When trying to figure out how much it will cost you to get your Bitcoin from a specific trading platform or broker, you have to take into account the total money you spend in comparison to the total Bitcoins you’ve received.
The right thing to do would be to also calculate the transaction fee a specific platform would charge you. But there isn’t just one fee to take into account – there are actually five.
Five Transaction Fees is Normal on Bitcoin Exchanges
The most common fee you’ll encounter is the transaction fee. This is what any trading platform or broker will take as a fee for their service. This fee can vary between exchanges from as little as 0.2% to as high as almost 3%. Finding the transaction fee should be pretty easy, as most exchanges list it on their FAQ or fees section.
Now we come to the second tier of fees – deposit and withdrawal fees. Whenever you’ll want to use a specific platform, whether it is a broker or a trading platform, you’ll have to deposit some money first. Depending on your selected payment method you’ll have very different deposit fees. Usually, the riskier the payment method is to the exchange, the higher the fee.
When I say “risky”, what I mean is: how much is the seller exposed to chargebacks by the customer? For example, when you wire your deposit to the exchange, there is no option for chargebacks. Once the money arrived at the exchange it’s theirs. On the other hand, if you use a credit card, debit card, PayPal or any other form of 3rd party payment form you will usually be entitled to chargebacks if you request them. Since the exchange needs to take this into account they will usually have higher fees for these methods
For example, you can find an exchange that has a 0% deposit fee on wire transfers and a 4% deposit fee on debit cards, so as you can see this can become a pretty considerable amount when added to the transaction fee.
But unfortunately it doesn’t stop there…
Several exchanges will even charge you a withdrawal fee for withdrawing your own Bitcoins. Although not as common as the deposit fee, the withdrawal fee is another variable for your calculations.
Most of the time you’ll find the deposit and withdrawal fees only on the “deposit” and “withdrawal” sections after you’ve registered an account and logged in.
So that’s it? Are we done with all of the fees? Not quite…
There are two more types of fees we need to consider. They may not be directly related to the exchange we are buying from but they will affect our bottom line.
The first is the payment processor deposit fee. Depending on your payment method, the payment processor may charge you a fee for using their services. For example, if you wire in money to an exchange, your bank will probably charge you some sort of fee for that. If you use your credit card to deposit at an exchange you may get charged as well.
The main issue with this fee is that it’s pretty hard to locate. You will need to contact each payment processor individually and ask them how much they will charge for this specific transaction. You’ll be able to avoid this fee if you wire domestically or within the same region (e.g. SEPA transfers).
The last fee, which you will most likely be able to avoid in many cases, is the currency conversion fee. If you deposit US dollars in an exchange that accepts only Euros you will also need to pay a fee for converting your currency; this may be done by your bank or the exchange. The wise thing to do here would be to avoid the need to exchange the currency in the first place. Try depositing currencies that are accepted by your exchange of choice.
Yes, now we’re done.
An Example of a Bitcoin Exchange’s Fees
Let’s use a short example to see just how much these fees can affect the exchange rate. I’ll use Bitstamp as the exchange and a wire transfer as the payment method. The reason for this is that the fees on wire transfers are (supposedly) the lowest.
Let’s say I have $250 to spend and if I just take Bitstamp’s current exchange rate at face value that should give me exactly 1 Bitcoin. But now let’s see how much the addition of fees will affect this.
- International bank transfers to Bitstamp carry a 0.05% deposit fee with a minimum of $7.5. In our case the deposit fee comes up to $7.5 since we don’t hit the minimum. So we’re already left with $243.
- Transaction fees for under $20K are 0.25% that is pretty reasonable. This means that I will need to deduct another $0.6 from my balance that will give me a total of $242.4.
- Now assuming the exchange takes place at the market price I will receive 0.9696BTC.
- Keep in mind that I haven’t even taken into account how much my bank will charge for the initial wire. Wire transfers in the US can cost up to $65. Even if we add a “decent” fee of $30, we’ll still arrive at only 0.8496BTC in the end.
- For the final part, let’s calculate the effective exchange rate for buying $250 worth of Bitcoins with Bitstamp using a wire transfer in the US. 250/0.8496 = $294 per 1 Bitcoin.
Now of course the wire transfer fee isn’t directly related to Bitstamp and it’s not “their fault”, but perhaps in this case I’m better off with a different exchange that will supply me with a deposit method that doesn’t have any bank fees. For example, if I live in the US, I can use Coinbase which supplies ACH transfers that cost virtually nothing.
To conclude, you can see that the exchange is only one out of many variables you should take into account when selecting where to buy your Bitcoins. Also, I’m hopeful that as competition ramps up and more exchanges emerge, fewer fees will be charged. At the current situation, even though Bitcoin is a decentralized currency, we’re just substituting old banks for new ones with all of these fees.