Cryptocurrencies may be the rage now, but here are some important factors you should consider before trading
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More than 100 million! That's how many Indians trade in cryptocurrencies, the highest in the world, according to BrokerChooser, a broker discovery and comparison platform. While the central bank and some industry experts say that number is on the higher side, it's an accurate enough estimate of the interest in crypto trading in India. Crypto has gone from being just talked about as an asset class to actually becoming an increasingly popular investment.
And it's not just seasoned investors, but also youngsters from Tier II and Tier III cities who are ploughing money into virtual coins—as much as Rs 6 lakh crore, according to the Blockchain and Crypto Assets Council (BACC), part of IAMAI (Internet and Mobile Association of India). That is an eye-watering amount considering cryptocurrencies are still unregulated and not legal tender in India. The central bank banned crypto in 2018 but the Supreme Court overturned the order in 2020. Since then, crypto trading has grown at a furious rate. And so have crypto exchanges.
And, obviously, crypto prices. For example, the price of one Bitcoin is north of $65,000 (Rs 50 lakh). But it's not merely the price of cryptos—which can be bought in fractions—but the cost of trading as well that can impact an investor's wallet.
So, what are these costs? For starters, exchanges charge a trading fee. A daily trader, for example, would want low fees or no fees, as some exchanges offer. But is there any such thing as a free lunch? Then there are maker-taker fees and the cost of withdrawing or transferring one's tokens. All such costs tend to be in the tens of rupees generally, but can add up to a significant amount to the trading price in the long run. Some of these costs are baked into the trading price and can be considered "hidden", while some are more transparent.
The Cost Behind the Premium
But let's start with why crypto prices differ wherever you look—India vs abroad or even on the various domestic trading platforms. What do these prices include? And more importantly, how does it affect one's trading cost?
Let's start with why crypto prices are higher in India. While trading in India has soared, the actual circulation of these digital coins is limited. Moreover, most of the crypto mining happens overseas. This makes the cost of crypto trading relatively higher in India.
On one-click trades, where the user buys/sells with the exchange taking on the counterparty role, fees are a bit higher. Some exchanges build this fee into the price the user pays rather than explicitly calling it that
Vikram Subburaj
Co-founder and CEO, Giottus
"The demand is high and growing, resulting in a slight premium of 2-5 per cent over the international rates across all cryptocurrencies. The INR premium comes attached with the buying and the selling prices, rather than the exchange fees per se," says Vikram Subburaj, Co-founder and CEO of Giottus Cryptocurrency Exchange.
But then domestic prices also differ. Consider this: on November 10, 2021, one Bitcoin cost Rs 52.7 lakh on WazirX, Rs 52.8 lakh on CoinDCX, and Rs 53.1 lakh on CoinSwitch Kuber. Why the difference? The short answer is exchange trading fees, but the more nuanced explanation boils down to the nature of the exchange and the available trading liquidity.
Nischal Shetty, Founder and CEO of WazirX, explains: "On WazirX if you are selling it at Rs 100 and someone wants to buy it, he will be able to buy it at Rs 100 and we will get the fees of 0.1-0.2 per cent, which is upfront. On closed exchanges, if you are selling for Rs 100, they will sell it to their customer at Rs 102. This is the amount you lose if you don't buy it on open order book exchange."
The Free Trades Myth
That brings us to the more nuanced explanation—the difference between an open order book and a closed order book exchange. Some exchanges are not actually involved in the buying or selling of a cryptocurrency. Rather they are just a platform to bring together buyers and sellers, much like a traditional stock market. These so-called open order book exchanges include the likes of WazirX and Bitbns, and their trading fees typically range between 0.1 per cent and 0.25 per cent.
Closed order book exchanges actually buy from and sell to their customers. They might not charge an explicit fee on each trade, but rather make their money on the price difference in trades. That is why they have a 1-2 per cent difference, called the spread, between their buying and selling prices. While CoinSwitch Kuber has a closed order book, CoinDCX and Giottus have both open and closed order books.
However, not everyone buys the explanation of free trading. "The fee is already included in their price and that's why they do not charge fees. It's a misrepresentation as the fees are included in the prices," says Shetty. Nonetheless, by virtue of being on one side of the trade, closed order book exchanges have to also contend with volatility risk. "On one-click trades, where the investor buys or sells with the exchange taking on the counterparty role, fees are a bit higher—may be up to 1 per cent of the transaction," says Subburaj of Giottus.
WazirX has an open order book, which means anyone is free to deposit and with- draw crypto. We have the highest liquidity in India. This is the cheapest place you could get crypto
Nischal Shetty
Founder and CEO, WazirX
"Some exchanges build these fees into the price the user pays rather than explicitly calling it that. This premium on one-click buy/sell is to accommodate the ease of trade as well as the volatility risk that the exchange takes on itself," he says. This volatility risk includes the availability of crypto—or liquidity, as it is called in market terms—and its price on that particular exchange.
And depending on whether they add to or reduce this liquidity, a trader could pay a cost known as maker-taker fees. Market makers, such as broking firms, try to buy at the current best bid or sell at the current best offer. They trade frequently, bringing much-desired liquidity to the exchange. On the other hand, market takers trade on the prices set by market makers. Such investors—which include individuals—trade much less frequently, thereby sucking out liquidity, and have to pay for that. "Some exchanges have zero maker fees for some crypto pairs," says Subburaj.
User, while entering, does not know whether he or she will be able to withdraw or deposit tokens. This is as problematic as banks saying you cannot move money from one bank to another
Gaurav Dahake
Founder and CEO of Bitbns and BACC member
Since the trading fees are higher in India, experts suggest trading in international markets. For this, one has to convert the Indian rupee (INR) to Bitcoin (BTC) or a dollar-pegged cryptocurrency such as Tether (USDT), also known as a stablecoin, as it was designed to always be worth $1. "Some international exchanges have a staggered fee structure depending on the volume of trade—the higher your monthly volume, the lower your fee structure," says Subburaj.
The Cost of Moving Currency
There are deposit and withdrawal fees to consider. While crypto exchanges generally do not take any fees for deposits, payment gateways can charge users anything from a fixed Rs 20 per transaction to up to 3 per cent of the deposit value. However, withdrawals are quite straightforward, with no fees in some cases and going up to Rs 10 per withdrawal.
"Certain exchanges charge fees because they use payment processors and those fees get passed on to the user," says Gaurav Dahake, Founder and CEO of Bitbns and BACC member. "In our case, deposits and withdrawals are free as we have created a payment processor of our own."
But that is cash. What about withdrawing tokens? "Each crypto has a blockchain that is based on where entries are created when a transfer between addresses occurs. For Bitcoin, the standard withdrawal fees can range between 0.0004 to 0.0008 BTC ($25 to $50 per transaction as per current prices) depending on the exchange. Some cryptocurrencies like Tron (TRX) enjoy very low withdrawal fees ($0 to $0.1 per transaction) and are often used to transfer value between users on exchanges," says Subburaj.
Though one can deposit and withdraw their tokens from one crypto exchange to another, not all exchanges support it. Especially not closed exchanges, as they trade in between. This does not sit well with Dahake. "The user, while entering, does not know whether he or she will be able to withdraw or deposit tokens. This is as problematic as banks saying you cannot move money from one bank to another."
As is clear, there are far more costs—some advertised, some hidden—in crypto trading than the price of the virtual coins themselves. And without any regulations, it's the wild west out there. There is talk that a crypto regulation bill will be tabled in the winter session of Parliament, and that may help transparency. Until then, one would do well to take into consideration much more than a crypto's sticker price.
Story: Teena Jain Kaushal
Producer: Vivek Dubey, Arnav Das Sharma
Creative Producer: Raj Verma, Nilanjan Das
Videos: Mohsin Shaikh
