Why Many Bitcoin Traders Should Avoid Lower Maker Fees

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Many crypto exchanges offer lower fees for makers and higher fees for takers. For example, Kraken charges 0.10% less for makers. (In US equities, makers usually get paid!) Sound enticing, but let's walk through this.

Order Types

Think about an exchange order book with a bunch of resting bids and asks. You go to enter a buy order and generally need to choose an order type. The most basic types are a market order and a limit order, where you also need to specify a limit price. Below is how it looks on Coinbase Pro.

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Placing the Order

There are 3 possible scenarios:

  1. You send a market order. Your order immediately trades against the best available (lowest) ask in the order book.
  2. You send a limit order with a high (relative to best available ask) limit price. Your order immediately trades against the best available (lowest) ask in the order book at the resting ask price.
  3. You send a limit order with a low (relative to best available ask) limit price. Your order does not execute and enters the order book as a resting bid. You order may or may not trade at a later point in time.

Maker or Taker?

In the 3 scenarios outlined above:

  1. Market order: You are a taker, since you choose to take the available liquidity (in the form of a resting ask) in the order book. For this immediacy, you pay the taker fee.
  2. Limit order with high limit price: This is effectively a market order and you execute immediately and pay the taker fee.
  3. Limit order with low limit price: You won't trade just yet, but your resting bid adds liquidity to the order book. Your order is now visible to potential sellers and allows them, for example, to enter market orders. If a market order to sell later gets sent to the exchange and your bid is the best available price, they will be a taker and you will be a maker and pay the maker fee. This fee is sometime lower to entice you to add liquidity to the exchange order book, which helps the exchange facilitate market orders and attract future orders.

When Will This Lower Maker Fee Hurt You?

There is a trade-off and the lower fee is not for free. If you are a taker, you immediately have your order filled and gain the exposure you want. If you are a maker, you have roughly a 50% chance of being executed. Let's walk through the possible scenarios. The market in Bitcoin is $9109.90 bid at $9110.10 ask. You decide to enter a limit order to bid $9109.90 and join the best price. One of the following will then happen:

  1. Market goes down. You are first in line to buy, with many behind you at lower prices. Imagine picking up pennies in front of a steam roller. Not good!
  2. Market goes up. You do not get filled and need to chase the market up and buy at a higher price. Not good!
  3. Someone sells to you, but then the market changes direction and goes up. Good luck!

Conclusion

With so many professionals and high frequency traders playing in the order book, you are most likely going to see scenario 1 or 2 and not trade at a favorable price. You might pay a lower exchange maker fee, but you are much more likely to end up paying too high a price or missing the trade and chasing the market. Leave this to the professionals and stick to market orders until you gain the confidence to consistently execute well as a maker or have powerful algorithms to automatically manage order placement.

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