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TLDR

Discount tokens are uneconomical/disadvantageous for most retail unless trading ~$100,000+ USD. This is because:

• They reduce your trading capital that could be more efficiently allocated to your trades rather than purchasing the discount token. 

• They have downside risks from holding them.

• Their value is based almost entirely on the speculative growth of their respective centralized exchanges.  

• If the exchange is compromised, they have no utility.

• Regulators could view them as equity in the exchange.

Utility of Discount Tokens

The purpose of discount tokens is to reduce trading fees on their respective centralized exchanges. While discounted trading fees sound attractive, they’re more risk than reward for most traders. We’ll compare multiple portfolio models that hold discount tokens to those that don’t hold any to see which is more profitable. We’ll also compare the centralized exchanges that use discount tokens to the centralized exchanges that don’t use them.

Portfolio Models

The model portfolios will start with $10,000. Let’s assume limit orders (maker) are used on the trades. We’ll also set a stop-limit order on all trades to minimize losses. The assumed target profit for each trade is 5% returns. 

BNB Portfolio

A typical trader who does less than 1 million BUSD in 30-day trade volume or has a BNB balance of greater than zero, but less than 25 BNB, pays 0.1% on the maker (limit orders) and taker (market orders) fees. 

When BNB is used to pay Binance trading fees on Binance, the discount is 25%. So, you pay 0.075% on the maker and taker fees. This requires you to allocate part of your portfolio to BNB to cover the fees. This move also exposes the BNB position to downside risk because it’s not a stablecoin. 

You can manage risk against volatility by setting a stop limit order to sell the BNB position if it falls below your purchase price. You may want to accept some marginal downside risk and place the stop limit order below the most significant buy order that it’s closest to the mid-market price to avoid market makers and trading algorithms from selling to trigger your stop limit order. You should also consider leaving enough BNB liquid to pay for any fees needed to close open positions. Binance has launched zero trading fees on 13 BTC spot trading pairs for maker and taker orders, but this may be a limited-time promotion. 

 The projected portfolio return using the BNB discount token was 178.60%, with a projected profit of $16,851.49.

Portfolio Using BNB to Pay Trading Fees

If you chose not to use BNB to pay the fees and instead paid the full fee of 0.1%, the projected portfolio return is $17,623.57. 

Portfolio Not Using BNB to Pay Trading Fees

Comparison of BNB Portfolios

Using discount tokens to reduce fees leads to smaller comparative returns in this scenario. It’s more profitable to not use them and instead take a larger position size in the trades to magnify the returns. You’d pay $205.09 more in fees by not using BNB to pay the trading fees, but you’d profit $772.08 more than if you did use BNB to pay the fees. This is because by not buying BNB, you can start with a larger portfolio and the returns, therefore, compound more. 

Total Fees Paid in Dollars Portfolio Returns

FTT Portfolio

A typical trader who trades less than $2 million in 30-day volume on FTX pays a 0.02% maker fee and a 0.07% taker fee. If you hold $1,000 worth of FTT on the exchange wallet, you can get a 5% discount. The lowest possible taker fee is 0.015%. The advantage FTT has over BNB is that you only need to hold FTT as you don’t use it to pay the fees. In the end, you still have your bag of FTT. Unfortunately, U.S.traders can’t transact in FTT. Staking FTT can reduce fees, however, unstaking FTT takes 14 days, or you can pay a fee to unstake immediately. Staking FTT isn’t ideal because then you can’t set stop limit orders to manage downside risk. FTT isn’t a stablecoin, so it can be volatile. 

The projected portfolio return using the FTT discount tokens was 176.38%, and the projected profit was $15,995.44.

Portfolio Holding FTT

When you don’t hold FTT and instead pay the full fee of 0.02%, the projected portfolio return is $17,772.31.

Portfolio Not Holding FTT

Comparison of FTT Portfolios

You’d pay $21.13 more in fees by not holding FTT, but you’d profit $1,776.87 more than if you did hold FTT and received the 5% discount in trading fees.

Fees Paid in Dollars Portfolio Returns

Coinbase Pro Portfolio

The fees on Coinbase Pro (soon to be absorbed by Coinbase) are calculated based on your total volume and are recalculated hourly. The first trade in the portfolio pays a 0.40% maker fee because the volume minus fees is less than $10,000. The $10,000 to $50,000 volume pays 0.25%. The $50,000 to $100,000 pays 0.15%. The $100,000 to $1 million tier pays 0.10%. Total volume doesn’t include volume for trading stablecoin pairs. Coinbase doesn’t have a discount token. The projected portfolio return was 169.83%, and the projected profit was $17,460.24.

Coinbase Pro Portfolio Value

Gemini Portfolio

The fees charged by Gemini’s ActiveTrader are based on 30-day trading volume. The maker fee is 0.20% for volumes less than $10,000. The maker fee is 0.10% for a volume greater than $10,000 and less than $100,000. The maker fee is 0.08% for a volume between $100,000 and $1 million. Gemini stablecoin pairs charge a 0.01% taker fee and no maker fee. Gemini doesn’t have a discount token, but they do have a stablecoin (Gemini dollar). The projected portfolio return was 172.99%, and the projected profit was $17,625.68.

Gemini Portfolio

Portfolio Analysis Conclusion

For the average retail trader, discount tokens are probably not worth using or holding. They tie up too much capital that can be better allocated to increase other position sizes to magnify returns. 

Total Returns of All Portfolios

When it comes to picking a centralized exchange to trade on, some other considerations are price slippage, the number of spot instruments, average spreads, and if they offer derivatives.

Average Price Slippage (BTC/USD)

Binance and FTX have very low average slippage. This is more of a benefit for larger whale traders who are trading $100,000+ per trade and can move the market price.

If you want to trade more altcoins, Binance, Huobi, or Coinbase Pro is optimal. 

Average Spread. Most Liquid Bitcoin Pair on Each Exchange.