The Costs of Trading: How to Reduce Expenses

dr.Gachet

dr.Gachet

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Whatever you 're investing in, the strategy of "buy and hold" is the most robust over time. This also applies to cryptocurrencies. It is important to understand how this investment mechanism works, because this is the only way to understand how to reduce trading costs — either by reducing the trade volume or by using features of the exchange you work with.

The Costs of Trading


Any form of trading involves spending, for example, 4% fee to deposit money into a Coinbase account from a credit card, or GDAX's 0.3% "taker fee" per trade order. In addition, there is a bid-ask spread, that is when neither a buyer nor a seller receives a market price, which is announced — when buying an asset, a buyer usually pays slightly more than the average price, and a seller gets slightly less.

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In addition, when you are trading, you influence the market, and it can move against you. For example, if you try to sell a large amount of an asset at once, its value will begin to fall, and vice versa. Every time we trade, we become a part of this process, and even small orders can move the market. And, finally, various trading strategies can result in different tax implications.

Fees

The more you trade, the more money you lose on fees and spreads. Spread is a difference between the price you pay and the average price of the crypto you buy. Usually spread is 0.2-1.5%, but exact value depends on the currency pair you're trading and when you're trading it. As a rule, frequently traded pairs have a lower spreads, but other factors also play a role. The good news is that spreads show a downward trend — last year they were much higher than now.

For example, if you trade GDAX every month for five years, then despite the relatively low fees of this exchange, you will spend an incredible 96% of your capital on fees. At the same time, one transaction would cost you only 1.6%.

Another example: Bitcoin price has increased by 20% over the past 5 years. This means that if you make a transaction per month, you'll lose 76% of your funds, but 'HODL' strategy could bring you an income of 18.4%.

Limit Orders

We can somewhat reduce the fees by using limit orders, but they do not guarantee that the order will be executed — much depends on how the market moves. And if you use, for example, Coinbase, then the total amount of payments can be much higher, up to 4% for credit card transactions and even more in a period of high volatility. Of course, the currency pair that you are trading matters too.

There are exchanges with relatively low fees: these are, for example, Kraken, Binance, and CEX. Bear in mind, that the cost of an operation is just one criteria; do not forget to evaluate the interface usability and security of an exchange, because in case of hacking low fees will be a weak consolation. In addition, it is useful to periodically compare exchanges' fees, as they are constantly changing.

Relatively High Costs for Crypto Trading

Today, the cost of trading in crypto assets is an order of magnitude higher than the costs of trading popular stocks and shares — this is normal for the new market, and the fees have been declining and may continue to do so.

Nevertheless, frequent transactions can cost so much that they will undermining any profitability. The HODL strategy is the most profitable in this case.
 
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