Coinbase, the popular crypto exchange, has played a significant role in luring new users into the crypto ecosystem. Coinbase offers a friendly onboarding process to new users, and also holds a position as a publicly-traded company. This means it looks like a conventional investment platform, even to investors who aren’t crypto savvy.
But it seems like every other week, readers can find articles criticizing Coinbase and the high fees it charges investors and traders. As the article unfolds, it offers a comparison between the prices of different exchanges. Coinbase versus this, Coinbase versus that.
Now that competition with regard to crypto exchanges is increasing, Coinbase is feeling immense pressure to lower prices. But even so, Coinbase and other exchanges’ biggest issue is more complex than the simple fee structure.
Let’s talk about commoditization and prices. What are commodities? They’re just fungible goods. It allows the market to treat goods, in their different appearances, as equal. When a service is commoditized, negotiation is based on price only. In this case, no more differentiation will take place between sellers.
When critics discuss trading fees, the argument is based on the assumption that crypto prices are static on all exchanges. Just like a commodity. Imagine Bitcoin as a commodity. If it were truly, then the only issue would be trading fees. Therefore, the criticism surrounding the fee structure of Coinbase would be fair.
But this perception of Bitcoin shows an underlying issue in the crypto market. Actually, Bitcoin prices aren’t the same across different exchanges – they can vary. This is due to market fragmentation: consumers are underpaying, or worse, overpaying, without realizing it.
But what is it about fragmentation and true price? It occurs when the contact between different exchanges in inadequate. This can cause pricing variations between different exchanges, and a lack of liquidity in the overall market.
When variations between prices are excessive, they overshadow any difference in fees between exchanges. Traders and investors are only trained to see prices on a solitary exchange. The true price of a crypto has two components. It includes its price on that particular exchange, along with the fees of that particular exchange. Price fragmentation implies that this price is compared with a similar calculation of another exchange.
Suppose that Bitcoin’s prices are low on one exchange. In that case, it doesn’t matter much if the exchange has low fees. Let’s say a single Bitcoin costs $60,000 with a fee of 0.50 percent at one exchange. In that case, an investor can end up paying around $60,120 with a 0.30 percent fee for a Bitcoin at another exchange. With so many exchanges, the price gap can grow big.