How profitable are exchanges?

[trader001]

What makes you say that chinese exchanges are profitable? Couldn't they simply be well funded?

For one thing, the fact that there are many of them.  Entrepreneurs do not rush to open businesses that are not profitable.

For another, that they have large fancy offices in prime locations, with many staff (Huobi had 50, IIRC). Either Huobi or OKCoin moved to larger offices some months ago.

Finally, they are indeed well-funded, but why would anyone invest in them (10 million US$ just in one of them, IIRC) if they were not profitable?

There are many laws that strictly forbid operators of ordinary stock exchanges from profiting by exploiting their privileged position -- namely, their knowledge of the order book before it is posted to the public -- to trade against their clients.  Those laws do not apply to bitcoin exchanges.  Why would the owners not do those things, if they are legal for them?

They can do anything they want. When the exchange is not regulated by the government, it will be regulated by their customers.

Push things too far and all their customers will take their money elsewhere.

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[JorgeStolfi]

When the exchange is not regulated by the government, it will be regulated by their customers.
Push things too far and all their customers will take their money elsewhere.

But there isn t much choice for the "elsewhere", especially if all of them are abusing their position.

If "customer regulation" was enough, there would have been no need for government regulation.

One problem is that many of those exploits are nearly impossible to detect by looking at the trade logs.  Their only effect is to make all ordinary clients less lucky.  E.g., the ordinary trader who posts a sell order will have it filled by a buy order at his ask price; whereas, if the exchange were honest, there would have been a buy order at a higher price waiting for it.

Last May, the five largest Chinese exchanges, apparently scared by some government pressure, released a joint note  pledging (among other things) to end leverage trading and put a fee on high-frequency robot trading.  I read between the lines that they were caught doing some dirty tricks (which depend on fast-acting robots), and were scared enough to stop, or cut back on them.

I would even guess that those dirty tricks were responsible for the general downward price trend from February to April, as ordinary Chinese traders were disappointed with their "bad luck" and cashed out, one by one. Indeed, that "five-exchanges" note coincided with the end of the downward trend and a month of steady price.

[ajareselde]

MCXNow, Crypsy, BTCT, BTC-E?

I'm conducting a survey to determine the actual profitability of the popular exchanges.

Does anyone have any idea of what the volume is for these exchanges? What these exchanges make weekly or monthly and how we could find out?

big exchanges earn so much that they could define bitcoin price only by keeping their profits in bitcoin/fiat.

im not quite sure what they do with their profits, but imagine the price if all of them keep fee profit in btc...

[picolo]

MCXNow, Crypsy, BTCT, BTC-E?

I'm conducting a survey to determine the actual profitability of the popular exchanges.

Does anyone have any idea of what the volume is for these exchanges? What these exchanges make weekly or monthly and how we could find out?

big exchanges earn so much that they could define bitcoin price only by keeping their profits in bitcoin/fiat.

im not quite sure what they do with their profits, but imagine the price if all of them keep fee profit in btc...

Their revenue may be big but they have huge costs which are mostly dealt with in USD so they have to be net sellets of BTC

[ShakyhandsBTCer]

What makes you say that chinese exchanges are profitable? Couldn't they simply be well funded?

For one thing, the fact that there are many of them.  Entrepreneurs do not rush to open businesses that are not profitable.

For another, that they have large fancy offices in prime locations, with many staff (Huobi had 50, IIRC). Either Huobi or OKCoin moved to larger offices some months ago.

Finally, they are indeed well-funded, but why would anyone invest in them (10 million US$ just in one of them, IIRC) if they were not profitable?

There are many laws that strictly forbid operators of ordinary stock exchanges from profiting by exploiting their privileged position -- namely, their knowledge of the order book before it is posted to the public -- to trade against their clients.  Those laws do not apply to bitcoin exchanges.  Why would the owners not do those things, if they are legal for them?

China has a lot of excess capacity in many ways, mostly in commercial real estate but in other ways as well.

The fact that they have offices in prime locations with a lot of staff could mean they are well funded.

I would find it plausible that Chinese exchanges were trading using their own funds for profit and were making a lot of money. I would also say that this practice can be extremely risky and would make holding funds at these exchanges risky as well.

[Harley997]

MCXNow, Crypsy, BTCT, BTC-E?

I'm conducting a survey to determine the actual profitability of the popular exchanges.

Does anyone have any idea of what the volume is for these exchanges? What these exchanges make weekly or monthly and how we could find out?

big exchanges earn so much that they could define bitcoin price only by keeping their profits in bitcoin/fiat.

im not quite sure what they do with their profits, but imagine the price if all of them keep fee profit in btc...

Their revenue may be big but they have huge costs which are mostly dealt with in USD so they have to be net sellets of BTC

They could potentially pay some of their expenses in BTC

[JorgeStolfi]

I would find it plausible that Chinese exchanges were trading using their own funds for profit and were making a lot of money. I would also say that this practice can be extremely risky and would make holding funds at these exchanges risky as well.

This recent interview with Bobby Lee (CEO of BTC-China) is quite relevant to this question:
https://bitcointalk.org/index.php?topic=178336.msg7510644#msg7510644

[arbitrage001]

sure that big exchanges will very profitable
since many of traders trading there, and they get coin from trading fee
i am interested from where chinese exchange who doesn't add trading fee get income?

Once citizens of emerging markets start to use bitcoin then it can reach it's potential.

Why would citizen of emerging market will choose bitcoin vs their own currency?

maybe because their national currency was inflated
inflation will make they choose bitcoin instead their own currency

I have yet to see local trade being done using bitcoin due to economic incentive. If you know any country with population that use bitcoin on everyday transaction, please kindly share the news.

[ALToids]

sure that big exchanges will very profitable
since many of traders trading there, and they get coin from trading fee
i am interested from where chinese exchange who doesn't add trading fee get income?

Once citizens of emerging markets start to use bitcoin then it can reach it's potential.

Why would citizen of emerging market will choose bitcoin vs their own currency?

maybe because their national currency was inflated
inflation will make they choose bitcoin instead their own currency

I have yet to see local trade being done using bitcoin due to economic incentive. If you know any country with population that use bitcoin on everyday transaction, please kindly share the news.

Many countries have small businesses that take Bitcoin.  Withing 15 miles of my house there are 67 Bitcoin businesses.  The large companies are the holdouts.

[JorgeStolfi]

Within 15 miles of my house there are 67 Bitcoin businesses.  The large companies are the holdouts.

Do they take bitcoins, or do they take dollars from BitPay-like companies (that sell your coins and give the dollars to the merchant)?

[arbitrage001]

Many countries have small businesses that take Bitcoin.  Withing 15 miles of my house there are 67 Bitcoin businesses.  The large companies are the holdouts.

What is the daily volume on bitcoin transaction?

[ShakyhandsBTCer]

sure that big exchanges will very profitable
since many of traders trading there, and they get coin from trading fee
i am interested from where chinese exchange who doesn't add trading fee get income?

Once citizens of emerging markets start to use bitcoin then it can reach it's potential.

Why would citizen of emerging market will choose bitcoin vs their own currency?

maybe because their national currency was inflated
inflation will make they choose bitcoin instead their own currency

I have yet to see local trade being done using bitcoin due to economic incentive. If you know any country with population that use bitcoin on everyday transaction, please kindly share the news.

How do you define "local trade"?

Almost every (if not every) business that accepts bitcoin does so because of economic reasons

[Harley997]

Many countries have small businesses that take Bitcoin.  Withing 15 miles of my house there are 67 Bitcoin businesses.  The large companies are the holdouts.

What is the daily volume on bitcoin transaction?

For exchange volumes: http://markets.blockchain.info/ The 24 hour volumes in USD will display at the top for the major exchanges.

[tooil]

Many countries have small businesses that take Bitcoin.  Withing 15 miles of my house there are 67 Bitcoin businesses.  The large companies are the holdouts.

Where do you live? I think you are making up the number and pulling off data from your ass.

[DannyElfman]

I would find it plausible that Chinese exchanges were trading using their own funds for profit and were making a lot of money. I would also say that this practice can be extremely risky and would make holding funds at these exchanges risky as well.

This recent interview with Bobby Lee (CEO of BTC-China) is quite relevant to this question:
https://bitcointalk.org/index.php?topic=178336.msg7510644#msg7510644

It sounds like they may be using customer funds to trade. This is very risky and unethical as it is not the exchanges money to be risking like this, especially without disclosure.

[JorgeStolfi]

I have noticed some annoying inconsistencies in Bitstamp's trade log, as reported by BitcoinWisdom (in the lower right sub-window of the clart).  Some past entries of the log change quite a bit when the chart is hard-reloaded. More details here.  Note, for example, that in this section of the logs one trade for 0.036 BTC became 0.34 BTC after reloading the chart.

The problem seems limited to Bitstamp.  BitcoinWisdom's owner says that Bitstamp's chart data API does not provide the trade type ("buy" vs "sell") so he has to guess it somehow; and the entries also have some timestamp/order problems that explain why the ordering and timestamps change after reloading. I don't understand yet how those shortcomings of their API could cause the BTC amounts to vary, as noted above. Anyway, they should fix those bugs, otherwise clients who notice those retroactive changes may get the wrong (or right?) ideas.

If the Shrem Karpeles & Friends Foundation (aka Bitcoin Foundation) was worried about building public trust, they would define minimum transparency standards for exchanges, including full and immediate disclosure of the complete history of bid/ask orders and all trades, accurately ordered and timestamped; and they would monitor exchanges for compliance.  But if pigs had wings...

One thing that would improve transparency a lot would be to attach a scrambled client ID to each bid/ask submission, and the two IDs to each trade.  That would not reveal the identity of the clients, but would allow other clients to check the logs for suspicious behavior by other clients or by the exchange owners.  (Professional auditors could later certify, under NDA, that those IDs are mapped to the actual clients in 1-1 fashion.)

[ShakyhandsBTCer]

One thing that would improve transparency a lot would be to attach a scrambled client ID to each bid/ask submission, and the two IDs to each trade.  That would not reveal the identity of the clients, but would allow other clients to check the logs for suspicious behavior by other clients or by the exchange owners.  (Professional auditors could later certify, under NDA, that those IDs are mapped to the actual clients in 1-1 fashion.)

This would get a lot of people to stay away from exchanges, at least people who plan on buying/selling large amounts. If it was clear that scrambled id "1234" was buying large amount of bitcoin then other traders could also buy expecting the large buyer to further drive up the price. The result would be that this large trader essentially pays a higher price then if several small traders bought the same amount at the same time

[JorgeStolfi]

One thing that would improve transparency a lot would be to attach a scrambled client ID to each bid/ask submission, and the two IDs to each trade

This would get a lot of people to stay away from exchanges, at least people who plan on buying/selling large amounts. If it was clear that scrambled id "1234" was buying large amount of bitcoin then other traders could also buy expecting the large buyer to further drive up the price. The result would be that this large trader essentially pays a higher price then if several small traders bought the same amount at the same time

Yes, many traders would not like even that limited increment in transparency. But others may like it, if it makes them feel more confident about the exchange.  Exchanges with and without unique client codes could coexist, so that clients could choose.   That is something that the market (or should it be the meta-market?  ) seems capable of deciding.

But I don't think that they would be necessarily inconvenient, even for big traders.   In your example, other traders would not know whether the buying whale has a preset max price, or how much he intends to buy; or whether the small traders will keep on buying too.  And such a buying whale would be sharing the market with many other traders -- including big selling whales, for which the same reasoning would lead to the opposite effect.

Moreover, it is a zero-sum game (in the short run at least), so any change in the rules will have no net effect on profits when averaged over all traders.  To evaluate such a change one must use other criteria, e.g. whether it seems more "fair" to traders and thus avoids them blaming the exchange for heir bad luck.

[ShakyhandsBTCer]

One thing that would improve transparency a lot would be to attach a scrambled client ID to each bid/ask submission, and the two IDs to each trade

This would get a lot of people to stay away from exchanges, at least people who plan on buying/selling large amounts. If it was clear that scrambled id "1234" was buying large amount of bitcoin then other traders could also buy expecting the large buyer to further drive up the price. The result would be that this large trader essentially pays a higher price then if several small traders bought the same amount at the same time

Yes, many traders would not like even that limited increment in transparency. But others may like it, if it makes them feel more confident about the exchange.  Exchanges with and without unique client codes could coexist, so that clients could choose.   That is something that the market (or should it be the meta-market?  ) seems capable of deciding.

this would defeat the purpose of having client codes as it was said previously that they would be installed to make sure no one is doing anything nefarious and a criminal could simply use an exchange that does not use these client codes

But I don't think that they would be necessarily inconvenient, even for big traders.   In your example, other traders would not know whether the buying whale has a preset max price, or how much he intends to buy; or whether the small traders will keep on buying too.  And such a buying whale would be sharing the market with many other traders -- including big selling whales, for which the same reasoning would lead to the opposite effect.

If a whale is buying a lot of bitcoin they will need to do it gradually, over time (over hours or possibly even days for very big whales). The whale will likely drive up the price regardless if others know that he is buying so his maximum price is likely somewhat above the price when he is just starting to buy or else he would never get his order filled.

There would be no reason for other small traders to stop buying as a whale buying would not stop them. All things being equal they would continue to buy.

Unless both whales are trading at the same time then this would not be the case.

[JorgeStolfi]

Exchanges with and without unique client codes could coexist, so that clients could choose.   That is something that the market (or should it be the meta-market?  ) seems capable of deciding.

this would defeat the purpose of having client codes as it was said previously that they would be installed to make sure no one is doing anything nefarious and a criminal could simply use an exchange that does not use these client codes

The intended purpose of the unique client code idea was not to prevent criminal use of bitcoins by clients,  but to prevent certain unethical behavior by the exchange, possibly with complicity of some privileged clients.  (Of course it woudl only work  if the uiqueness of the codes was certified by independent, reputable auditors.)

Unique client codes would  also immensely improve our knowledge of the market.  For instance we could tell how many coins have been bought for each given price and not sold yet; that would provide an estimate of long-range liquidity that may be much more rreliable than the order book.  We could tell whether the market is concentrating or distributing bitcoin ownership.  How many active traders there are in each exchange.  And much more.