Cryptocurrency Exchanges Are Raking in Billions of Dollars

(Bloomberg) -- Digital-asset exchanges are emerging as one of the biggest winners of the cryptocurrency boom.

The top 10 are generating as much $3 million in fees a day, or heading for more than $1 billion per year, according to estimates compiled by Bloomberg using trading volume reported on data tracker CoinMarketCap.com and fee information on the exchanges' websites. Fees in the lowest range of the exchanges' scale were used for the calculations.

The projections are a rough estimate as it's near impossible to know what exactly the closely held firms are charging, including discounts for their most active traders. Based on daily trading volume and fees listed, annual revenue for the top 10 goes into the billions of dollars. While the numbers aren't exact, the order of magnitude shows the boom in virtual currencies is generating some very real cash.

“The exchanges and transaction processors are the biggest winners in the space because they're allowing people to transact and participate in this burgeoning sector,” said Gil Luria, an equity analyst at D.A. Davidson & Co, who reviewed the methodology for the revenue estimates. “There's a big business there and it would not surprise me if they're making hundreds of millions of dollars in revenue and possibly even billions a year.”

Tokyo-based Binance and Hong Kong-based OKEx are handling the largest volume of trading, equal to about $1.7 billion daily. Based on fees of 0.2 percent, which are higher than OKEx's 0.07 percent for the most active traders, Binance is likely bringing in the most cash per day.

Huobi, Bitfinex, Upbit and Bithumb, which are all based in Asia, come next in the ranking. They process between $600 million and $1.4 billion of trading volume and charge fees of 0.3 percent on average. More than half of the crypto currency trading happens in Asia-based exchanges, according to data compiled by smart contract platform Aelf.

Asia's influence in crypto trading can be explained by a concentration of cryptocurrency mining in the region from Bitcoin's early days, as miners took advantage of cheaper electricity costs, said Aelf co-founder Zhuling Chen. Other reasons include the region's young population, which adopts new technology quickly, consumers that are comfortable with mobile payments, and even a strong gaming culture, which incentivizes virtual transactions, said Chen. Tightening regulation in the region, with China and South Korea restricting trading and initial coin offerings, also means that Asian firms have been forced to become global, he said.

Binance's prominence is notable considering the firm started operating in July. It shifted headquarters to Japan from Shanghai after the Chinese government tightened its grasp on the industry late last year. The firm can process 1.4 million orders per second, which it says makes it one of the fastest exchanges in the market.

Its loose customer accreditation process may also explain its growth, said Chris Slaughter, co-founder of crypto investment platform Samsa. It's also very reliable, he said.

“They don't make users go through the know-your-customer process until withdrawal,” Slaughter said. “It's a complicated process. You can lose customers in the two or four hours that it takes. In Binance, you can go from not having an account to having funds on an account in less than 20 minutes.”

South Korean exchange Upbit, which is among the top five in trading volume, only started operating in October. It's controlled by Dunamu Inc., which also owns Kakao Talk, the most popular messaging app in Korea. Upbit is integrated in Kakao Talk and lists over 120 cryptocurrencies, thanks to a partnership with the U.S.-based exchange Bittrex.

All of the exchanges are privately held and only a few years old, which often means it's difficult to find financial information or details on management. HitBTC, the 10th largest, doesn't provide any information on who runs it or where the firm is based, even as customers asked these questions on the exchange's forum. Bit-Z, WEX and EXX, among the 20 biggest by trading volume, are some of the others that don't provide those details either.

Bitfinex, among the five biggest, has come under heavier scrutiny as the U.S. Commodity Futures Trading Commission sent subpoenas to the company in December.

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Potential competition from public companies and traditional financial firms may push crypto exchanges to be more transparent and even reduce costs, said Slaughter.

“More conventional businesses like banks and funds are likely to acquire crypto platforms at some point to make sure they have a strategic foothold in the market,” he said. “It's a no-brainer. Financial services is where all the real business revenue in crypto is.”

To contact the reporter on this story: Camila Russo in New York at crusso15@bloomberg.net.

To contact the editors responsible for this story: Michael P. Regan at mregan12@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Andrew Dunn

©2018 Bloomberg L.P.