The ethereum virtual currency logo is displayed on an automated teller machine (ATM) at the Coin Trader bitcoin retail store in Tokyo, Japan, on Wednesday, Aug. 30, 2017. Stock of Bitcoin, the best-known digital currency, has surged 358 percent this year. While staggering, lesser-known competitors have seen even bigger gains, such as the more than 4,000 percent increase for ethereum. Photographer: Tomohiro Ohsumi/Bloomberg
The ethereum virtual currency logo is displayed on an automated teller machine (ATM) at the Coin Trader bitcoin retail store in Tokyo, Japan, on Wednesday, Aug. 30, 2017. Stock of Bitcoin, the best-known digital currency, has surged 358 percent this year. While staggering, lesser-known competitors have seen even bigger gains, such as the more than 4,000 percent increase for ethereum. Photographer: Tomohiro Ohsumi/Bloomberg

Rising transaction fees for Ethereum could be a deal breaker for day traders

Until quite recently, owing to the ongoing DeFi craze, the price of Ethereum seemed to have surged overnight. Indeed, according to many analysts, the explosion of DeFi has been the top driver for growth in Ethereum. Moreover, DeFi’s Total Value Locked figures have grown from below $1 billion at the beginning of 2020 to $10 billion upwards. Not only has this multiplied the revenue of ETH miners but also increased transaction fees for traders.

Therefore, while the situation for miners is rewarding, the bargain is too expensive for a trader. Indeed, according to Binance’s CZ, each ETH transaction will also contribute to the exchange losses of $10-$20, with CZ saying withdrawal fees will have to be revised in the near future.

Source: Twitter

Other exchanges will surely emulate Binance’s move to increase withdrawal fees, and this will impact the profits of day traders and arbitrators. On the contrary, HODLers will be the least affected by high withdrawal fees because they rarely withdraw and they are not affected by high/low charges.

This is a real challenge since traders are the biggest users of exchangeable deposit and withdrawal features. A major challenge faced by traders when it comes to day trading is that the volatility is much lower than what can be found over a longer interval of time. However, while there are multiple opportunities for profit-booking, the margin is small. The profit gained will be nominal with high withdrawal fees as a huge chunk will go into paying these fees.

It skews the risk-reward ratio against day traders. This problem is actually more serious for traders who profit on multiple exchanges or run arbitrage bots through arbitrage. The rise in ETH withdrawal fees could downgrade their trade incentive. While the number of active ETH traders has steadily increased over the past 90 days, this number may fall if withdrawal fees are increased and profits are lowered.

Source: Glassnode

If the withdrawal fees on Binance are indeed revised. It may increase by $10-$12 per transaction as per a tweet from CZ. Needless to say, most other crypto-exchanges on the market may just be following suit.

Source: Glassnode

Arbitrage bots can run in losses with an increase in withdrawal fees as profit margins continue to shrink. This could reduce the demand for crypto exchanges on fiat. Day traders should anticipate this potential drop in ETH prices and plan positions as appropriate.

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