Coinbase provides a user-friendly platform for trading, buying, selling, or converting cryptocurrency. However, their website doesn’t clearly specify the charges involved in making these transactions.
In this article, we’ll walk through a transaction on Coinbase to show you exactly what fees you can expect.
Why does this matter?
Imagine that you invest $500 in cryptocurrency. You see the value of your investment rise to $550 and decide to sell, assuming you’ll make a $50 profit, right? Well, not quite. Since you’re using a platform to trade, like Coinbase, you have to consider the transaction fees or any other associated costs.
Let’s say the fees amount to $25 when you buy the crypto, that would bring your total investment to $525. Then, when you sell, there’s another $25 fee, making your total cost $550. So, if you sell at $550, you’re not actually making any profit at all, you’re merely breaking even.
That’s why it’s crucial to understand the fees charged by the trading platform. When you include these fees in your cost calculations, you have a clearer idea of the actual selling price you need to set in order to make a profit, and you can more accurately estimate how much that profit might be.
How much coinbase charge when you trade?
We’re going to figure out exactly how much we’re being charged by simulating a trade on the Coinbase mobile app, essentially determining the fees involved in a transaction.
We’ll use a Coinbase account I have that contains $612.48 worth of Bitcoin. By tapping the ‘Convert’ button, I can change my Bitcoin into a variety of other currencies, including several stable coins.
To get an accurate idea of the fees Coinbase charges, we’ll convert the Bitcoin into USDT, which has a one-to-one ratio with the US dollar.
Once you hit ‘Preview convert,’ Coinbase will show you an estimation of how much USDT you’ll receive after accounting for the spread and other potential fees. In this instance, the conversion will yield approximately $600.10.
Let’s simplify this and break it down:
Before any conversion, the value was $612.48. However, after conversion, it was reduced to $600.10. It’s important to note that Coinbase didn’t impose any extra fees or taxes. So, where did the difference of $12.38 (that is, 612.48 – 600.10) go? Well, it was accounted for in the “spread” during the exchange.
Now, if we convert this scenario into percentages, it becomes more apparent. Imagine that the original amount of $612.48 is considered 100%. After accounting for the spread, the amount was reduced to $600.10, which is 98% of the original. In other words, the spread amounted to 2%, or $12.38 of the total value.
What does this mean?
Imagine there’s a 2% charge each time you make a transaction. In this scenario, even though you think you’re investing $612.48, after the fees, you’re actually only investing $600.10.
If you’re buying a cryptocurrency (one that isn’t a stablecoin), you should know that you’re effectively losing 2% right off the bat.
When should I sell to make a profit?
To explain, let’s consider that every time you trade, you lose about 2% to the spread (the difference between the buy and sell prices). Let’s see how this works in a practical scenario.
Let’s say you invest $100 in a cryptocurrency that is currently worth $30. Due to the 2% spread, your actual investment is $98, not $100. So, investing $100 means that your investment is initially down by 2%.
If the value of the coin increases by 2%, going from $30 to $30.60, you’d be breaking even on paper. But remember, there’s likely to be another 2% spread when you sell, so it wouldn’t be wise to sell at this point.
To sell and make a small profit, the coin would need to increase by at least 5% from its original price of $30.
So, if the coin’s value goes up by 5%, from $30 to $31.50, and with a 2% that goes to the spread when buying and selling, here’s how things work out:
- You start by investing $100 in the coin when it’s worth $30. But with the 2% buying spread, your actual total investment is $98.
- When the coin’s value rises 5%, it goes from $30 to $31.50. This means your investment is now worth $102.90.
- When you sell, there’s a 2% spread based on the coin’s current worth, which is $2.058. So, if you subtract this from your investment’s worth ($102.90 – $2.058), you get $100.842.
This means that with your original investment of $100, after the coin’s value rises by 5%, you make a small profit of $0.84 once you account for the spread.
Usually, trading platforms tend to charge a larger fee when the trading volume is small. The fees mentioned in the example may seem high, but they typically reduce significantly if you’re trading larger amounts, such as in the thousands.
So, it’s a good idea to thoroughly understand the pricing and fee structures of the platforms you’re using. This will help you decide if it’s worth trading on these platforms. If you’re using Coinbase, specifically, you can visit their dedicated page to get a clear picture of their pricing and fees.