What are maker fees and taker fees for cryptocurrency traders?

Cryptocurrency trading fees

In our previous articles, you learned about candlestick patterns in trading and the most common types of orders. Now, one more basic trading topic is left on our list. 

Cryptocurrency trading is not free. In order to trade as effectively as possible and selecting the right trades, it is important for traders to know about the common types of trading fees cryptocurrency exchanges charge for orders.

In general, when calculating fees on a cryptocurrency exchange, orders are classified into two categories: those charged with “maker fees” and those charged with “taker fees”.

What is a maker fee and who does it affect?

An order that adds liquidity to an order book until it is picked up by another trader helps to “make the market”. 

For instance, a limit order for a trade on an exchange is usually not immediately filled. It is only triggered once the price of an asset such as Bitcoin rises or falls below a certain limit. 

Therefore, a trader who places an order like this “makes liquidity in a market” for other traders. By placing this order, the trader adds liquidity to the order book and, regarding this order, is referred to as “maker” for providing other traders with new options. 

In order to be considered a maker order, a sell order placed by the would-be maker has to be higher in price than the highest buy order, or the trader would need to place a buy order that is lower in price than the lowest sell order. 

Maker fees for orders are often lower than other fees. Exchanges have an interest in attracting traders to their platforms in order to generate liquidity. Liquidity on an exchange indicates the extent of market interest based on the number of active traders and overall trading volume. Lower maker fees therefore incentivise creating a market. 

The disadvantage of being in the role of a maker is that it will often take makers longer to fill their orders, namely until the market triggers the set limit price. 

If you think of liquidity as the activity on an exchange, we can use the analogy that makers keep traders flowing while simultaneously helping an exchange to grow and “takers”, who are in a symbiotic relationship with makers, execute the orders as described in the next section.

What is a taker fee and who does it affect?

“Takers”, on the other hand, is the term used for traders who are looking for trading options they can fill immediately, or as quickly as possible. Such an option could be a market order - remember a market order is based on immediacy. Takers place buy orders or sell orders for filling orders available in an order book and pay taker fees upon execution. 

Let’s imagine a trader places a buy order for 1 Bitcoin (BTC) and fills a market order for this trade.

A market order will always fill immediately. If an order is so large that there is not enough liquidity in the order book at this time, it will be rejected since a market order can only be filled fully or rejected. So if there is not enough liquidity in the order book to fill 1 BTC, then the market order will be rejected due to insufficient liquidity.

Remember that market orders are available regardless of the current price of an asset. Therefore, our taker fills the order almost instantly to buy the 1 BTC without delay and pays a slightly higher taker fee for the convenience and fast execution provided by the exchange and the makers.

In most order books, orders are limit orders and stop limit orders, which remain in the order book for a long time. There is always a maker and a taker to a filled order. Placing a limit order with the same price as what is currently in the order book will be filled as a taker.

Orders that are both a maker and taker order

However, an order can both have a maker and a taker fee. Example: Trader A wants to buy 1 BTC for EUR 10,000, so he places a buy limit order in the order book and hopes that the price goes down to EUR 10,000 so that his order gets filled. Now comes Trader B, who wants to sell 2 BTC. Trader B also places a sell limit order to sell 2 BTC at EUR 10,000.

Once Trader B places the order, it will instantly match with Trader A's order. Trader A will pay a maker fee but Trader B will pay a taker fee for the 1 BTC that he just sold. However, as only 1 of the 2 BTC has been sold, Trader B’s order is now only 50% filled and remains this way in the order book. Once Trader C eventually buys the 50% of BTC of that order, Trader B will pay a maker fee for the remaining BTC he sold to Trader C.

What are market makers?

Finally, for purposes of clarification, “makers” and “takers” as order types must not be confused with the term “market makers”. Market makers act as traders that promote liquidity in a market to ensure efficiency in trading by holding a large number of assets that can be bought or sold at very short notice. 

In any case, a cryptocurrency exchange has paramount interest in traders creating liquidity and trading volume on its platform. Therefore, exchanges incentivise traders accordingly.