Despite predictions of doom, Wall Street thrived as stock trading commissions fell last century. The same could happen in crypto, but it won’t be easy to replicate.
By guest author Telis Demos from the Wall Street Journal.
WSJ’s Dion Rabouin explains why many investors are still betting on crypto, even with the very real threat of losing all their money. Illustration: Rami Abukalam
As cryptocurrency firms try to keep warm during the market’s freeze, there might be a way to stoke the fire: lower fees.
Small investors can pay a steep price for the privilege of trading bitcoin and its many digital brethren. The range of costs, from network fees to commissions or spreads for using an exchange or brokerage app to trade, look like cents on the dollar but can be many times higher than what it costs to trade stocks or move money.
For example, the Ethereum platform last year generated about 100 times the average fee-per-transaction versus the revenue-per-transaction of Visa’s vast platform, according to figures compiled by finance professors Igor Makarov and Antoinette Schoar in a National Bureau of Economic Research working paper. Likewise, retail traders might pay a lot more than what they would for an equivalent stock trade when they buy or sell crypto. Some platforms that serve many of the smallest investors, such as Cash App, Coinbase COIN -4.18%▼ and PayPal, collect more than 1% of their crypto trading volume as transaction revenue, according to figures compiled by Autonomous Research analysts.
Customers might actually pay more or less than that rate, depending on things like the size of their order. But it has been years since the typical commission on a USD 1000 online stock trade was USD 10. Many stock brokerages have ditched charging commissions or market spreads altogether.
Maybe 1 % doesn’t seem like a lot to pay for one trade. But consider turning over a USD10000 portfolio each week in a year, trading 104 times. Even if each trade was at the same price, a person paying 1 % on the value of each trade would be left with around USD 3500.
Crypto traders, motivated by the lure of windfall gains or highly loyal to trusted platforms, might just not be as fee-sensitive as stock traders. Even so, costs appear to be starting to decline. Bitcoin’s network fees have fallen, partly as a result of falling prices. Some argue that a major change in how Ethereum works, known as “the Merge,” will lead to higher rewards and eventually lower costs.
Retail crypto platforms are adjusting, too. Coinbase is integrating its trading product catering to more active traders, which can be more complex to use but provide lower pricing for some trades, into its main app. Binance.US this year cut all fees for certain bitcoin trades, making it akin to a zero-commission stock trade. Autonomous analyst Christian Bolu noted that Binance.US was the only exchange he tracks to see sequential average daily volume growth in the third quarter through early September.
At first blush, a price war would be bad news for crypto firms. But the old punchline about price cuts—you can make it up in volume—isn’t totally a joke when it comes to trading.
In fact, the history of the stock-trading business might even give investors hope about crypto’s future. On May 1, 1975—known as May Day—stockbrokers were forced to abandon fixed commissions. Individual investors’ effective commission rates on the value of a trade fell almost 20 % from April 1975 through mid-1980, and institutions’ commissions fell even more, according to Securities and Exchange Commission data from that time. Yet that was hardly the end of Wall Street: Broker-dealers’ commission revenues actually doubled from 1975 to 1980 as trading volume surged, according to SEC data.
But those hoping that crypto can emulate traditional Wall Street should also consider the wider story. Eventually, the climb in commission revenue plateaued for a time during the 1980s even as volume continued to grow. What continued to help propel the securities industry to being an economic juggernaut was consolidation and a broader diversification of services and sources of revenue, areas like research, mutual and exchange-traded funds, wealth management and banking services, says Reena Aggarwal, director of Georgetown University’s Psaros Center for Financial Markets and Policy. Securities commissions made up nearly half of broker-dealers’ total revenue in 1975; by the 1990s, they represented less than a fifth, according to SEC data.
The lesson isn’t just to pump up the volume but to move away from trading as the core of the business. Making digital-asset wallets into a central account, holding and earning on tokens as more than just speculative investments, is already a part of many crypto firms’ playbooks. By connecting its trading platforms, for example, Coinbase aims to make it easier for advanced traders to use its non-trading products.
But diversification will be a long journey for crypto. Whether nonfungible tokens are a long-term business remains to be seen. And product diversification faces regulatory hurdles. There is likely strong demand for expanding passive products, such as lending crypto to generate yield, or “staking” tokens to earn rewards—but those activities have received varying degrees of regulatory scrutiny. The SEC still hasn’t approved an exchange-traded fund that directly owns cryptocurrencies. Regulators also have expressed concerns about crypto in retirement accounts.
Another crypto boom might lower the pressure on fees. It might also draw in more competitors. Fidelity Investments is already weighing adding bitcoin trading to its retail platform, the Journal has reported. Mergers to gain scale—both within crypto and across to traditional players—could be the key to better economics, as it was in traditional brokering.
“Once the Wild West is over and the strongest players survive, you expect there will be consolidation,” says Ms. Aggarwal. “But it all depends on what regulators allow.”
Becoming another arm of Wall Street wouldn’t be what many crypto backers have envisioned. But brokers that have survived the most winters might be the best prepared for the next one.