How to Choose the Canadian Crypto Trading Platform That’s Right For You - Part 1
Your little brother, your gamer cousin, and more than a few (bad) Tinder dates have tried to evangelize to you the benefits of investing in Bitcoin/crypto. You’ve had colleagues think they would quit their jobs in early 2021 from it, you’ve seen friends get scammed, and even your best friend’s dad managed to buy ‘paper’ bitcoin via his traditional online stock brokerage.
If you know you need to get started but don’t know where to begin, this guide is for you.
This week we cover a short section on fees: This is how these companies pay rent and keep the lights on. Next week, we’ll go through a hypothetical example to illustrate how crucial Fee Transparency and literacy can be throughout one’s investing life… And finally, in January, the last section will cover all the other important factors you’ll probably want to look into before picking your crypto trading platform. Onward!
FEES MATTER
Over the average investor’s lifespan, fees and commissions can (and do) add up to millions. So how does one learn to “do their own math” when navigating these (purposefully) murky waters? This is what we’d like to help you learn how to do in these next few short weekly articles.
The total cost of buying crypto isn’t only about how much commission you pay your broker or the spread they pocket: It’s about the long-term opportunity cost compounded over the time one holds it… (It’s a lot.)
Say you paid a 1.5% spread on a $1,000 Bitcoin purchase 6-years ago. Any idea how much that 1.5% is worth today?
$7,300.00. Now that we have your attention, let’s dive in.
What’s a spread?
A spread (also known as the market spread or bid/ask spread) is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller will accept (ask).
Spreads are how market makers get paid for their services: It’s not necessarily dishonest if there’s clarity.
How the spread is calculated
Spread = Lowest asking price - Highest bidding price. ASK - BID = Spread
Spread as a percentage = (Spread/Ask)*100
An example
Say your crypto trading platform is selling bitcoin at $41K (this is the ask), but buying it at $40k (the bid). The spread is $1K.
Spread as a percentage? ($1,000/$41,000)*100 = 2.4%
Generally, the spread is a fair indicator of market liquidity. Typically, a high spread could indicate low liquidity and a low spread is often a result of high liquidity.
But liquidity is also determined by the demand for an asset and a crypto trading platform ’s order books and market depth.
How the spread impacts cost
Price Slippage occurs when you receive a less advantageous price than intended.
E.g.: Ask price for 1 BTC: $50,000. You bid $50K…
And your trade indeed executes, but you only receive 0.97 BTC! What gives? You suffered price slippage, sir/madam.
The truth about fees & spreads, when you get down to brass tacks, is that what may seem like an insignificant amount up front, over time turns out to be closer to a yearly salary. How did you think the financial industry became so large?
You buy bitcoin ($1000). You pay 1% commission fee. ($10) but secretly, you also lose 1.5% more to slippage (the spread; $15).
This transaction cost you $25 of bitcoin. That’s not terrible, right? Wrong: Enter the 8th Wonder of the World… Compound interest.
“He who understands it, earns it; he who doesn't, pays it.”
- Einstein (meaning no doubt to include all genders…)
The total cost of your trade
If you held that BTC 5 years, compounded at 125%/y, the spread alone cost you $865… 10 years? Compounded annually at 125% for 10 years, $15 dollars becomes $49,879: That’s why Einstein called compound interest “the eighth wonder of the world”.
“It’s science.”
-Ron Burgundy, ANCHORMAN
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.