Recently, a friend and I were talking about Bitcoin and investments in general. Ultimately this conversation led him to finally buy Bitcoin, but it also opened my eyes to some of the problems that new investors and traders often face. One of my friend’s biggest worries was the issue of fees associated with buying, sending, and trading Bitcoin.

Exchanges May Need to Rethink Fees

Anyone who has purchased cryptocurrency is well aware that exchanges always take a cut for using the service. I have no problem with that. After all, they are businesses and must turn a profit to stay open, pay employees, maintain infrastructure, and grow. Fees will always exist, but percentage-based fees can add up very quickly.

Take, for example, one of the most popular places to buy Bitcoin, Litecoin, and Ethereum: Coinbase. Apart from a few hiccups, they run a rather nice service and make both purchasing and selling the three cryptocurrencies they support mostly painless. This is where my friend purchased his first Bitcoin, and he was astonished by the fee structure he encountered. While Coinbase’s fees are not outrageous, they do leave something to be desired.  For customers in the United States, Coinbase has a base rate of 4% but a portion of that is waived if using a particular payment or withdrawal method over another. Still, let’s do a little bit of math on how quickly even the lowest possible fee adds up.

Using a bank account transfer or a Coinbase USD wallet carries the lowest fees for both buying and selling cryptocurrency at 1.49% per transaction. In this scenario, we buy US$1,000 worth of Bitcoin — just about .25 BTC at the time of writing — using a bank account. At 1.49%, that transaction cost us just under US$15. Let’s say that a month later the market has been kind to bitcoin, and our .25 BTC is now worth $2,000. Since we are in the black and want to turn a profit, we decide to sell that .25 BTC for USD. Coinbase takes its 1.49% of that sale, which is now US$30. While we have turned a profit, we are docked fees left and right. In our hypothetical situation, we have already spent US$45 on fees for two transactions, and we still have to worry about taxes and miners fees. Percentage fees add up quickly, especially if users are transacting larger amounts.

One possible solution for this would be to move exchanges closer to traditional investment platform models. These take a flat fee per transaction, regardless of amount. That fee is usually somewhere between US$7 and US$10, with lower ones for options trading and so forth. For a quick comparison, if I were to buy 100 shares of Tesla valued at about US$347, the fee I would pay for that US$34,700 transaction would be US$10. As things currently stand, if I were to purchase US$34,700 worth of BTC from Coinbase, that transaction would cost me US$517 at the lowest. While flat fees may discourage lower value trades, it would be cheaper for users to pay a flat US$10 fee whenever the amount was over about US$675 dollars worth of Bitcoin (or Ethereum, or Litecoin).

This is not a problem unique to Coinbase, of course. This was just one useful example of how quickly compounding fees can stifle investor profits. Many people getting into crypto are investing less than US$675 for purchases, but percentage fees may be one of the reasons why cryptocurrency could struggle to court the deep pockets of traditional investors. At some point in the future, exchanges may need to modify their fee structures.