Risk or Reward: What It Takes for an Exchange to Cash In on a New Currency?

Since it appeared online about a month ago, new cryptocurrency bitcoin cash has been under scrutiny from users, miners and investors, all intrigued by how this first large-scale hard fork in the original bitcoin network will affect them.

But it’s maybe the consumer-facing businesses, namely the exchanges, that are most under pressure to make a decision, given the software development time, costs and regulatory burdens that go into supporting any new cryptocurrency with a unique blockchain.

Some, however, came to a conclusion quick. Kraken and Bitfinex, two popular exchanges, embraced Bitcoin Cash immediately after the split.

According to Jesse Powell, Kraken’s founder:

“Kraken was one of the few exchanges to say early on that we’d support bitcoin cash for both funding and trading. Many exchanges were initially undecided about the extent of their support and some even said they wouldn’t support it at all. Now more exchanges have come around to say that they will support it, though some have said the support may not come for several months yet.”

Powell’s comment takes a jab at Coinbase, the largest U.S.-based exchange, which initially came out strongly opposed to listing bitcoin cash. But as bitcoin cash continued to look successful – and after many of its users complained, some even filing a lawsuit – Coinbase did an about-face.

Now, the exchange says it’s working to support the currency by January 1. According to an August 3 blog post, Coinbase decided to support bitcoin cash “based on factors such as the security of the network, customer demand, trading volumes and regulatory considerations.”

Picking sides

The varying degrees of acceptance and support for this new cryptocurrency represent deeper divisions in the bitcoin community, specifically about the vision for the future of bitcoin (and cryptocurrency in general) and what will make the market most stable while allowing it to grow.

“Everybody has their own opinions on the viability of differing models,” said Marco Santori, partner at Cooley LLP, and the leader of its fintech practice.

That debate, and questions about whether an exchange will “onboard a new cryptocurrency… and how many people will actually want it, have created some sharp divisions in the desirability of bitcoin cash,” he said.

For Kraken, who generally stayed out of the scaling debate as it was happening around the beginning of August, the answer was simple.

Powell said, “We thought that the bitcoin cash fork was pretty likely to be successful and wanted our clients to benefit from it as much as possible, which means letting them trade the new tokens as soon as possible.”

Plus, the exchange saw it as a way to increase their own revenue.

Powell continued:

“There can be a lot of price volatility around a fork and this presents a huge trading opportunity. We in fact had a rather large influx of new clients who signed up at Kraken and deposited their bitcoins with us prior to the fork so they could get their bitcoin cash and trade around this major event. Of course, we benefit too if there is a lot of trade volume so it can be a win-win for us and our clients.”

While many of Kraken’s users immediately sold all their bitcoin cash, Powell said, “for every seller, there’s a buyer,” pointing to the bitcoin cash price not just holding up, but jumping recently to more than $700.

“There are even ‘big-blockers’ out there who think bitcoin cash will eventually eclipse regular bitcoin, and probably some of these folks sold all their bitcoin for bitcoin cash,” Powell contends.

Risk or reward?

While the trading volume and revenue gleaned there seems like a positive for exchanges, there are other things, as Coinbase mentioned in its post, exchanges must be wary of.

According to Calin Calianu, a Bitcoin ABC contributor, the exchanges “weren’t sure what was going on. They were nervous. Initially exchanges were requiring 10 to 20 confirmations on blockchain until deposits could be marked as cleared.”

Recently, though, the early adopting exchanges like Kraken and Bitfinex reduced requirements to 10 or fewer confirmations. Yet, Powell said, that isn’t surprising since it’s always been quick to support new tokens with its “let-the-market-decide view.”

But Calianu, who supports bitcoin cash’s mission, told CoinDesk:

“Others are being a little more cautious. It isn’t the safest currency to use. There’s one big miner that, if he wanted, could totally attack the network.”

He continued, stating the factoring of the risk versus the reward also characteristic of the size of the exchange.

“Some are taking the larger risk of supporting bitcoin cash because they’re smaller and want to attract business [whereas] Coinbase is big and doesn’t see it as a risk they want[ed] to take. They want to see first if it’s worth their investment, if it’s going to go anywhere,” Calianu said.

While there could be some ideology still at play, it could also be exchange’s lack the technical expertise required to support new cryptocurrencies, which take a certain amount of software development. (That is, unless they’re tokens built on top of the ethereum platform).

Powell explained Kraken had to add support for the new currency pairs that needed to be enabled, as well as support for deposits and withdrawals in the new token.

“At Kraken, we are fortunate to have the technical ability to list new assets fairly quickly, though it is by no means trivial,” he said. “Probably the most time-consuming part of the process is adding the new funding gateways, because we are very careful about that and have many custom security features in our wallet systems.”

Calianu seconds that, explaining that development costs can be quite expensive. He predicts to implement support for bitcoin cash could cost anywhere between $200,000 if the developers were really efficient and $1.5 million.

Exchanges “don’t want to spend the money and the several weeks development time, and then have the thing disappear the next day,” he said.

Continuing questions

Beyond the technical infrastructure alterations, Powell points out that in the case of a fork, his exchange has had to determine answers to a bevy of other major questions, including: which trading pairs it will offer; how soon after the fork it should enable trading in the new pairs; how margin trading would be handled across the fork; and how soon after the fork Kraken would enable deposits and withdrawals in the new token.

“At this point,” Powell admits, “we don’t have a set policy about any of these things, and look at it on a case-by-case basis as the forks come up.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Coinbase and Kraken.  

Cash register via Shutterstock