Ask HN: why are Bitcoin trading fees so high?

7 points by em70 12 years ago | 5 comments

Most FX brokers charge customers fractions of a basis points per trade, and they run a legit operation that often has high costs for compliance, customer support phone numbers active 'round-the-clock, efficient and reliable IT infrastructure, substantial banking costs for account management and more.

Compare this with the largest bitcoin exchange by volume, MtGox. They offer a terribly unreliable service, slow customer support, high exposure to counterparty risk for the funds you entrust them with, have to comply with fewer regulations (and recent events suggest they fail to do even that) and yet charge two orders of magnitude more than any competitive retail FX broker.

I understand that there is still little competition in the space where they operate, but the situation has been lasting for a while and I am wondering if there is any good reason why things should remain this bad. Is there perhaps something structural that I am not seeing?

turboroot 12 years ago |

Because they can.

Most FX brokers do not "exchange money", that is in the sense that you can withdraw the quote currency. Because of this, they don't have to deal with money laundering.

FX brokers and MtGox also have different business models. Brokers usually make money off their spreads, slightly adjusting their quotes in their favor. Traders on MtGox trade directly with other users, not against the company. This attracts different crowds.

Fiat is also not as volatile as Bitcoin. A .35% fee on Forex would completely devastate profits. Meanwhile, Bitcoin rises and falls 10% on a good weekend.

Bitcoin exchanges would be comparable to stock exchanges like NYSE or NASDAQ, except volume is lower in the tens of magnitudes.

em70 12 years ago | |

FX brokers like LMAX, while still targeting retail investors, make money (almost) exclusively on commissions, rather than adjusting the spreads.

Many liquidity provision strategies are also infeasible given the unreliability of the APIs available and the high fees, and in general many intraday strategies that work in other markets and would work with lower commission for bitcoins are devastated by such high fees.

As for stocks, if your volumes are decent, trading costs are negligible. With bitcoin exchanges, that does not seem to be the case...

bachback 12 years ago |

yes, they should be much lower. Essentially the reason is the lack of competition. MtGox charges so much, because they can. Simple. And big players are not entering the market. B24 charged 0.00% per trade (the exchange was taken down though). In fact if you think about it BTC transactions could and should potentially have almost no cost, as opposed to fiat exchange transactions, which have a lot of overhead. The problem with bitcoin is that the exchanges are the new bottleneck for couterparty risk. In any network it is always the exit nodes that count.

The problems are mostly of a legal nature. There is a layer missing, which has not yet been implemented. The problem evolves around identity. Would it possible to link a name in a register to a virtual address globally? Nation states still want to collect taxes and money is tied to the power of nation states (you can witness what happens if this connection is removed in Europe).

If you want build an exchange you will have to a deep pocket for legal. On top of that this is quite a challenging task.

If you're interested in a discussion about this drop me a line at nfx9@hush.com

scottmcleod 12 years ago |

Regulation, banks, KYC compliance and security are the bottlenecks right now.

andyakb 12 years ago | |

Traditional brokerages face all of these issues as well and actually comply with them, all while offering lower fees.

There are a handful of startups that are looking to have offerings that are appealing to funds and other non-retail investors, so things do seem to be going in that direction. For the time being though, it is more profitable to cater to the retail investors than pursue a low margin [potentially high volume] clientele.