Crypto Trading Fees: Many traders need a hedgefund performance or more just to break-even on fees
TL;DR:
- Often underestimated, trading fees have a large effect on your performance
- For a scalping trader, 265% profit p.a. are required to break-even on trading fees, or requiring a hit rate of 60% (RRR=1)
- Each trading style has a different fee-optimized exchange
Trading is a game of probabilities and as a trader, we want to bring ourselves in situations with lots of upside and tightly managed downside. For any trade we enter, in theory there should be a 50/50 chance of the price moving in our direction or not (if Return Risk Ratio (RRR) =1). However, for every trade we enter, we also pay a fee, our exchange fees in crypto trading, which in many situations has a much bigger effect on our probabilities as we would think. The fee rates look like small percentages, but let me guide you through 3 examples showcasing the total effect of trading fees on our performance. Trading fees are especially important in crypto trading compared to other markets such as Forex trading, commodity trading, etcetera in which I started at. In a second step, I am going to show you how to best manage your fees, but let’s first of all have a look at the examples:
We have three crypto traders, all with a 50,000 USD balance, however all with a slightly different trading style. The scalping trader has 10 trades a day, the daytrader 5, and the swingtrader 1. The maximum risk they take per trade differs as well as the amount of market and limit order they place. Let’s first of all have a look at how much fees they would pay in a non-fee optimized scenario. We only considered the largest 15 crypto exchanges here.
The scalping trader has to pay 133,000 USD in fees, the daytrader 72,000 and the swingtrader 20,300 US Dollar. Those are not some unrealistic fee rates. Our scalping trader in this example is actually trading with maker fees of 0.017% and taker fees of 0.051% at MEXC. However, due to leverage and the fairly high trading frequency in this case, the fees add up to such high amount. Given the 50.000 USD balance, that trader would have to make 265% in return per year just to break-even on trading fees.
Let’s now have a look how high the fees in a fee-optimized scenario would be. All other input variables stay the same. Our scalping trader could reduce the fees to 39,000 USD, the daytrader to 24.4 thousand and the swingtrader to 6.9 thousand. This fee optimization is purely based on choosing the exchange that fits the trading style best. In case of the scalper, this is for example Kraken, but for the SwingTrader it is ByBit. Depending on the overall trading volume, whether trading spot or futures, more maker or taker trades, usd-margined or coin-margined futures, the fee-optimized exchange is very different.
So how can you quickly find out which exchange is the cheapest for your personal trading style?
The easiest way is to go to dr-fee.com just type in the volumes you would like to check. In this example, we will use our scalping trader from the example shown above: The monthly futures volume was 21.67 million, 0% maker trades, 50,000 USD balance, and 0% holding in the native exchange token.
So we get this output which shows the fees for that exact trading style at all the major exchanges; we can see Kraken being the cheapest exchange with 39k. We can also de-select and select all the other exchanges. There are actually only exchanges shown which also offer perpetual trading as we typed in perpetual volume and operate in the country we chose earlier.
Coming back to our example, we can clearly see that trading fees do have a massive effect on trading performance, especially if not operating at a fee-optimized exchange. The yearly performance can easily be improved by 50 to 100% for many traders, and those numbers are not compounded yet.
Looking at a whole year, the effect is even stronger as the lower fees become your profit, which is being used for trading again.
What else can be done to further reduce the fee impact on your performance? Traders originally coming from Forex trading may not be familiar with this, but maker trades, so trades executed with a limit order are much lower priced compared to market order trades, oftentimes 5 times lower fees. So increasing the share of limit orders can significantly lower fees in crypto trading.
Summary:
Circling back to our initial statement of a 50/50 chance of winning in a trade. If we would assume a return risk ratio of 1 in a trade, and no fees, yes, that would be correct! Considering the fees, you may actually need a 60% hit ratio in order to break-even in fees if not trading in a fee-optimized set-up in case of the scalping trader example. So, as one of the steps to actually succeed in trading, in this game of probabilities, we need to get this percentage to as close as 50% as we can by ensuring an efficient fee set-up.
Hopefully you liked this quick walkthrough about the fee impact on trading performance in the crypto market. If you would like to stay up-to-date with all the other analyses coming, please subscribe our channel or also follow us on Twitter:
Stay safe and happy trading!
All information in this article may not be up-to-date anymore while reading and should not considered to be financial advice!
