Crypt currency wallets are the starting and ending point of any transaction in the world of digital currencies – banks and other intermediaries are simply absent here. However, most of them are free. Let’s take a look at the sources of their profits.
First of all, a few words should be said about the crypto wallets themselves: usually free programs or mobile applications that allow you to work with crypto wallets – store, send, receive and manage public/private keys. On the whole, they all look quite primitive, but some are quite popular and even earn serious money. How is this possible?
Wallets do not make a profit from transactions
There is a misconception that crypt currency wallets earn by withholding commission from transactions. This has taken root because some exchanges (wrongly considered wallets) charge decent withdrawal fees (and sometimes deposit fees). We, who have learned from our bitter experience with the classical financial system, believe that any intermediary involved in a transaction is bound to receive its share.
The fees charged by wallets are in fact fees for the services of miners registering the transaction in the register. Wallets have nothing to do with mining (although they may act as a separate, fully fledged unit involved in the transaction). Here is a description of this process from Coinbase:
„In general, Coinbase does not charge a fee for using the digital wallets service. Transferring virtual currency to the Coinbase platform address may result in a network fee (e.g. bitcoin miner fees) that the user has to pay. All fees will be communicated to the user before the transaction“.
But there are also exceptions. Bitgo, a multi-signature wallet, charges 0.25% of all inbound and outbound payments in exchange for secure storage in the interest of business. Bitgo is intended for large companies that need trusted storage of digital assets, not for individuals.
This is their core business model (at least for the time being). With a large number of users and a wide range of applications, wallets earn good partner rewards from third-party services.
The most popular is the ability to instantly exchange crypts via Shapeshift or Changelly services. The latter have a very generous partnership programme, as rates are usually much higher than market rates. Customers pay for convenience, and purse developers are rewarded by the service provider.
Finally, some wallets allow you to buy digital assets directly from your credit card. The services are provided in cooperation with companies such as Simplex. Simplex pays the developers remuneration from each transaction.
Users pay for convenience, while rewarding the creators of wallets. In addition, wallets generate traffic on exchanges ready to pay high fees for new customers. Everyone has partnership programmes. Even hardware wallets (which cannot be called free) often participate in such events. Finally, some of the software wallets, such as mycrypto, earn money by offering users hardware wallets.
The financial performance of wallet-developing companies is usually unknown, but it is safe to say that 90% of their revenue comes from one or more of the sources listed above.
The main problem with hardware wallets
Hardware wallets (or „cold storage“) usually have a fairly simple business model: they are paid for by the customer. Prices range from $50 to $300. Production of the wallets themselves is inexpensive (around $20), so the profitability of such projects is incredibly high, which allows for generous partner programmes (for example, Trezor offers a cacheback of 10%).
True, this model has one drawback: one-time shopping. The average customer is not tempted to change his wallet every year for a new one (unlike a smartphone). He buys a wallet (and a second one for the reserve), and his interest ends there. In theory, purse manufacturers can no longer offer him anything new.
Developers are well aware of this and embed links to all kinds of services into the software or try to enter new promising markets (like depository storage).
Hybrid wallets/exchanges
Some wallets allow you to buy cryptov currencies, but unlike integration with a third party, they work directly with the exchange. For example, Xapo or Blockchain.info (probably the largest crypto wallet at the moment) allow you to buy bitcoins and ether. They charge trading fees and sometimes earn money by converting ordinary currencies.
Some projects are completely selfless
Many of the crypt currency wallets are open source projects that are not aimed at making a profit. However, their freeware usually has an impact on usability.
Other projects (e.g. Ethos) do not need to take care of profits because they raised a huge amount of money during the IPO and monetising the service is not a priority for them.
Finally, some wallets are free as they are controlled by companies earning money from other services and wallets are a business cost for them. This applies, for example, to the Trust Wallet. The wallet was purchased by Binance, so it is completely free (and will probably remain so).
New boundaries
Wallets thus depend either on the revenue from partner programmes or on one-time user purchases. Partner programmes can hardly be called a reliable basis for long-term growth: nobody knows when they will be cancelled.
Is there a sustainable development path for crypto wallets? It is still difficult to answer this question.
In the end, each consumer will have their own wallet, like a smartphone or TV. These projects will occupy a significant niche in the industry – the same niche as browsers or email clients on the internet. At the same time, partner programmes or even purchase/sale transactions are unlikely to be the basis for compensation for operating expenses (quite significant). In the future, new items of income will appear which will support the development of crypt currency wallets. It is difficult to say exactly what they will be like. It is likely that profits will be linked to the work of consensus protocols and incentives paid to node operators.
There may also be additional revenues in the form of direct or indirect user payments, as we are all used to paying for software and services. The existence of many non-game paid mobile applications suggests that this idea is quite feasible. New banking service models such as N26 or Revolut show that people are willing to pay for services that are worth it. Similarly, they will pay for decent and comfortable crypto wallets.
Today, the industry is bound by all kinds of partnership programmes in anticipation of better times. Hardware wallets promote exchanges. They cooperate in software wallets, which in turn promote exchanges and hardware wallets.
Of course, the industry has to develop, but this process will only take place once fresh money is available, new rules are introduced and the cryptocurrency economy has moved to the next level. Crypt wallets are still in their infancy, being the fundamental basis of crypto-economics.