Crypto Exchanges and Fees Explained

Fees are the one part of your crypto returns you control. The price will do what it does, but two people buying the same coin on the same day can pay very different amounts for it, and the difference repeats on every buy and every sale. This lesson covers how to choose an exchange, where each fee sits and what the gap costs over several years, with the arithmetic shown.

Choosing an exchange

An exchange holds your pounds and coins while they sit in your account, so choosing one is mostly a question of trust. Check these before you deposit:

• Registration. Crypto firms serving UK customers must be registered with the FCA for anti-money-laundering purposes, and the FCA publishes a register you can check. Registration is not a guarantee that a firm is safe.
• History. Mt. Gox in 2014 and FTX in November 2022 froze customer withdrawals, and customers waited years for partial recovery. A large, long-running exchange that has kept paying out through bad markets has at least shown it can.
• Withdrawals. Find out which networks you can withdraw on, what each costs and how quickly withdrawals are processed. Then test it with a small amount early, before you need it.
• Proof of reserves. Some exchanges publish evidence that they hold the coins their customers' balances add up to. Treat it as a partial check only. It shows one moment in time, it may not capture everything the exchange owes, and it is only as reliable as whoever checked it.

The layers of fees

A single purchase can pass through several fees, and an app rarely shows them all on one screen.

• Spread. The spread is the gap between the price you pay and the market price. Instant-buy screens and simple apps often take their fee this way, so the receipt can show no fee while you still pay above the market.
• Maker and taker fees. On the order book, an order that fills straight away against waiting orders pays the taker fee. A limit order that waits on the book until someone trades with it pays the maker fee, which is usually lower. Both are a percentage of the trade, and many exchanges lower them as your monthly volume grows.
• Deposit and card fees. Paying by card is usually dearer than a bank transfer, and some exchanges charge for deposits as well.
• Withdrawal and network fees. Every blockchain charges a fee to move coins, and exchanges pass it on as a withdrawal fee, sometimes with a margin of their own. The network you choose can change the cost a great deal, so check before you send.
• Staking commission. If an exchange stakes coins for you, it keeps a share of the rewards. Staking rewards are paid in the coin, so their value moves with its price, and some staking has lock-up periods during which you cannot sell.

A worked example: instant buy against limit order

As an example, take two ways to put £1,000 into bitcoin on the same exchange. The instant-buy button takes a 1.5% spread. A limit order on the order book pays a 0.1% maker fee. These rates are hypothetical, chosen to show the arithmetic rather than to describe any real firm.

• Instant buy: 1.5% of £1,000 is £15, so you get £985 of bitcoin.
• Limit order: 0.1% of £1,000 is £1, so you get £999 of bitcoin.

A £14 gap on one purchase looks trivial. Now repeat it. Say you buy £250 a month for five years, which is 60 buys and £15,000 in total. Instant buys cost 1.5% of £15,000, or £225. Limit orders cost 0.1% of £15,000, or £15. The gap is £210.

That is only the buying side. Say your holding is worth £20,000 when you sell. The same two rates cost £300 one way and £20 the other. Across the round trip, the instant route costs £225 + £300 = £525 and the order book costs £15 + £20 = £35: a difference of £490 on the same coins, bought on the same days.

Money lost to fees also never gets the chance to grow. If the coins you bought doubled in price, the £210 of extra spread would now be worth £420 had it bought bitcoin instead.

Small recurring buys and minimum fees

Automatic recurring buys are a good habit, but small ones can be expensive. Some apps charge a flat minimum fee on every purchase. As an example, a £0.99 minimum on a £10 weekly buy is 9.9% of each purchase: 52 buys a year cost 52 x £0.99 = £51.48 in fees on £520 invested.

Buy £40 once a month instead and you put in £480 a year for twelve fees of £0.99, which is £11.88, just under 2.5%. Placed as limit orders at a 0.1% fee, the same £480 would cost 48p, if the exchange accepts orders that small. Check the fee on a recurring buy before you switch it on. Dollar-Cost Averaging into Crypto covers setting one up.

Do not keep everything in one place

Low fees are worth nothing if an exchange stops paying out. In the UK the FSCS does not cover crypto, so when an exchange fails there is no scheme to make you whole. Lenders and yield products carry the same risk with less visibility: Celsius, a crypto lender that promised high yields, froze withdrawals and went bankrupt in 2022.

Keep on an exchange only what you are buying now or plan to sell soon, and move longer-term holdings to a wallet you control. Crypto Wallets and Self-Custody Explained covers how. If you do keep larger amounts on exchanges, spreading them across more than one means a single failure cannot take everything. Moving coins costs a withdrawal fee each time, so move in larger, less frequent batches.

Records and UK Capital Gains Tax

In the UK, HMRC can treat selling crypto, swapping one coin for another and spending crypto as disposals for Capital Gains Tax. That means swapping bitcoin for ether can count as a disposal, even though you never held pounds in between.

For every transaction, record the date, the coin, the amount, its value in pounds at the time and the fee you paid. Download your full history from each exchange every few months rather than trusting it to be there later, and add your own notes on transfers between your accounts and wallets so the trail makes sense to you or an accountant years from now. Rules change and differ by country, so check HMRC guidance or a tax adviser for your own position.

Key takeaways

• Check the FCA register, the exchange's history and its withdrawals; treat proof of reserves as a partial check.
• In the worked example, the instant-buy route costs £490 more than the order book over a five-year round trip on the same coins.
• Flat minimum fees make small, frequent buys expensive; buy less often or use limit orders.
• Do not leave everything on one exchange, and keep a record of every buy, sell and swap.