How to calculate fees
Learn how transactional fees are calculated in traditional finance and compare with world of crypto.
When we started Wert, we explored two distinct methods of calculating fees. There is a professional way, used by brokers and the financial services industry, and an amateur way which is widely used in the crypto space. It’s important as transactional fees play a critical role in determining the true cost of buying or selling assets, hence calculating the profit.
The simple way
The Crypto Way is straightforward and simple: users specify how much they want to spend in fiat currency, and the fee is calculated as a percentage of that amount. For example, if a user intends to spend $150 and the fee is set at 4%, the fee would be $150 * 4% = $6. In our opinion, this method is not fair as users end up receiving slightly less crypto than they anticipated, as they are charged the fee on the entire transaction amount.
How it should be done
In contrast, the Professional Way focuses on the amount of cryptocurrency the user intends to purchase, otherwise units of goods sold. Consider a scenario where a user wants to buy 0.75 ETH, and the current ETH/USD exchange rate is $200. With this method, the fee is calculated as a percentage of the crypto's value. In our example, $200 * 0.75 ETH * 4% = $6. This approach maintains the integrity of the user's intended crypto purchase.
How to actually make calculations
So, how can you provide users with the freedom to specify the fiat amount they want to spend while still using the Professional Way of fee calculation? This method is very similar to how the VAT is calculated in most of the world.
The answer lies in a two-step calculation:
- Calculate the proportion of the fiat amount used to purchase the asset: $150 / 1.04 = $144.23.
- Calculate the fee based on this adjusted amount: $144.23 * 4% = $5.77.
Conclusion
As you can see, the user ends up paying $5.77 instead of $6.00. This simple solution ensures users pay a fee based solely on the value of their crypto purchase, not the total transaction value. Transparency and user-friendly fee structures can set your platform apart and build trust with your customer base.