When free swaps are not free: How exchanges charge hidden fees in crypto

The crypto exchange Celsius launched a beta for its “free swaps” program. Swaps are converting from one crypto to another rather than selling one for USD and then buying the other. These swaps are beneficial because you are removing an extra transaction and the fees associated with those transactions. Now Celsius is launching its swaps program with a major advantage over its competition – no fees.

The Competition

Celsius touts its $0 and 0% fee along with its high APY and low APR compared with Coinbase and Binance crypto exchanges.

Here is how Celsius explains why they are better than the competition:

How does it work?

According to the Swap Beta terms of use (which everyone reads before they click accept), Celsius outlines three things: (1) how swaps work with Celsius; (2) which assets Celsius allows you to swap; and (3) exchange rates.

First, swaps act similar to the name. You exchange (or swap) one “Eligible Digital Asset” for another Eligible Digital Asset. For example, if you have BTC staked on Celsius and want to exchange it for ETH, here are the behind-the-scenes steps involved in the swap on Celsius:

  1. You stop staking the BTC you plan to swap (“Swapped Assets”).
  2. Celsius then removes the Swapped Assets from your Celsius account balance.
  3. Celsius takes the Swapped Assets and exchanges them for the Eligible Digital Asset you chose to receive, here ETH, at the exchange rate (“New Assets”).
  4. Celsius puts the New Assets into your Celsius account balance.
  5. You begin staking the New Assets with Celsius.

While this seems like a lot, it boils down to you telling Celsius to exchange BTC for ETH. Celsius then provides you with the exchange rate (for example, 14 ETH for 1 BTC), and Celsius executes the Swap.

Second, what are Eligible Digital Assets? Well, it depends. On its website, Celsius states “[w]e want to support as many pairs as possible. Some pairs may not be available in some jurisdictions due to local regulations. When Swap becomes available for you, login to your Celsius account and check which pairs are available in your jurisdiction.” Right now, it depends on which asset you are looking to swap. For example, BTC offers more swap options than AVAX. If you are interested in trying out swaps, be sure to see what options you have for each type of Crypto holdings.

In the above example you can see that if I wanted to exchange $1,000 of BTC for ETH, the exchange rate is 1BTC = 14.10178669 ETH. However, next to the exchange rate is a “1” which is a 4-second countdown timer before the rate changes. Off to the right you can see the resulting balance of BTC and ETH in your account.

Third, how does Celsius provide you with the “best Exchange Rates possible at all times”? Celsius is clear that they may not provide you with the “most optimal” Exchange Rate for every transaction, and they specify that you should “check if a better rate is available on other platforms.”

Celsius exchange rates include an “offset” from the market rate (a “spread”) to “mitigate both Celsius’ exposure to price volatility between the time the exchange rate is confirmed and when the transaction is executed.

Exchange Rate = Market Rate + Spread

Swaps are final; however, Celsius “may reject or cancel a Swap transaction” when they deem it “reasonably necessary.”

Is it really free though?

Celsius does not have fees. However, because of the spread, it is guaranteed that you will pay over market rate on swaps with Celsius. Celsius is not the only exchange that has spreads or something similar. When you purchase on these exchanges, there can be spread included on that as well.

Swaps still beneficial?

Yes. If you want to exchange your crypto for another, swaps may be the most efficient way to do so. Rather than incurring fees, spreads, and other transaction costs twice — first for selling the crypto and again for buying a different crypto — you only incur these costs once from the single swap transaction.

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