When exploring the possibility of entering the cryptocurrency exchange market, most people begin by enquiring…Read more
When exploring the possibility of entering the cryptocurrency exchange market, most people begin by enquiring about the price. In order to provide an apt estimate, we have broken down the expenses which contribute to the overall cost of operating a cryptocurrency exchange.
The first expense worth considering is the technological expenses associated with operating a cryptocurrency exchange. These expenses include both the price of the hardware and the cost of software.
In terms of hardware, a small exchange can operate using only a single server with a dedicated database. This could cost around a few hundred dollars per month. When it comes to software, however, the cost may be a lot higher. If you use software as a service (SaaS) offerings such as Qodex, for instance, the price can range from $4,000 to $15,000 in monthly fees. Typically, this price is scaled to the amount of users interacting with the network, its features, and the number of connected blockchains.
If you opt to host your cryptocurrency on your own, rather than leverage SaaS, you would need to employ part-time dev ops and/or a system administrator. Further, you would need to scale the number of servers that you operate alongside the number of active users that interact with your exchange. You may need one server per 300 requests per second at peak time. If you have 1,000 requests per second, then you should expect to require four medium servers at Amazon.
While a part-time system administrator could manage dozens of servers, hosting the exchange yourself means that you will need to host blockchain nodes. If these break — as they often do due to their unstable nature — you may need to hire a dedicated employee. This is especially important when dealing with lesser-known blockchains.
The cost of offering support
Another component that factors into the cost of operating a cryptocurrency exchange is employing customer support operators. These are people who are capable of answering user enquiries and dealing with support tickets.
Support operators can often be subdivided into three levels. The first deals with frequently-asked questions and delegates to the second level when necessary. Support staff on the second level have a better understanding of cryptocurrency exchange operations and can answer most enquiries. Lastly, support staff on the third level are tasked with addressing bug reports and challenging user enquiries. If finances are limited, first and second level enquiries can often be handled by the exchange operator directly, while level three enquiries can sometimes be mitigated to the software vendor.
As such, offering client support can cost nothing provided the exchange operator answers enquiries on your own. In fact, many small exchanges offer support without hiring dedicated support staff. However, dealing with these enquiries requires a great deal of time and participation on the part of the exchange owner. When your exchange grows beyond 30,000 users, it may be time to hire dedicated support personnel.
Some capital has to be reserved in order to provide liquidity to your cryptocurrency exchange. While this is not a cost in a traditional sense, you do need to plan ahead and have funds available to lock as a margin with liquidity providers. The easiest, yet most expensive, way to provide liquidity is to source it from well-known cryptocurrency exchanges such as Binance. Here, the exchange has to maintain an account with Binance in order to facilitate trades.
A more flexible solution is to use a specialized liquidity provider. In these instances, cryptocurrency exchanges deposit a margin to the provider and settle once per day. The status of settlements is monitored via a provided dashboard. The settlement is conducted either through bank, wire, or crypto transfers. This approach takes much less capital, since the exchange only has to hold a margin in USD. Compare this to leveraging a service like Binance, which would require that the exchange holds enough crypto for every asset it trades in order to cover the maximum possible range of trading activity.
The operator of a small cryptocurrency exchange can manage relationships with liquidity providers on their own. Even as an exchange grows its user base, this role rarely requires its own dedicated staff.
From the moment you offer fiat pairs on your exchange, you will need to have a compliance officer. Know your customer (KYC) obligations have to be fulfilled, though this can be conducted by third-party providers. However, you should keep in mind that each verified user could cost between $2 – 3 USD. This price may add up fast if you intend to conduct KYC for a significant number of users.
Some anti-money laundering (AML) requirements, however, are not as easy to outsource. While vendors do exist in this space that offer related services, it is hard to estimate the associated costs as complex integration would be required.
Cryptocurrency exchanges that deal with fiat currencies such as the U.S. dollar often require compliance officers who work on a part-time or full-time basis. These employees handle all of the paperwork required by regulators. In the United States, these regulators include the FINRA and the SEC.
Under U.S. regulatory frameworks, exchanges can either be considered a brokerage or a trading venue. A brokerage cannot hold its own order books and must delegate this responsibility to a trading venue. Trading venues, on the other hand, are either national exchanges or alternative trading systems. Obtaining and maintaining either license requires a significant amount of work on a monthly basis, even for smaller crypto exchanges. Platforms like Qodex, however, are able to provide built-in solutions to these issues.
Besides the required staff members outlined in previous sections and their associated costs, successful cryptocurrency exchanges require a marketing department. While this task can be handled by the exchange operator, an exchange’s marketing department will generally be structured to reflect the exchange’s size and status.
Institutional exchanges, for instance, will be in possession of a marketing department that is reflective of a business-to-business sales team. To market a retail exchange, on the other hand, operators will often employ services more akin to a business-to-consumer SaaS team.
Depending on your exchange’s goals, your marketing costs can differ drastically.
The total price
While running a cryptocurrency exchange on your own is extremely difficult, it is possible for an exchange to be run by just one person. In this case, operational expenses will be in the ballpark of $4,000 for hardware and software. This, however, is only possible if an exchange is managed by a SaaS company like Qoden. If not, additional personnel will be required to manage servers and blockchain nodes. For simplicity, we will title this tier as “Level Zero.” We can estimate that the monthly expenses of a Level Zero exchange are around $4,000 + the owner’s salary.
At Level One, an exchange is able to hire support, marketing, and sales personnel. In a country like Canada, this would increase expenses by at least $7,000 — assuming one person can handle all three of these roles. Here, the total price would be $7,000 + Level Zero costs.
At the next tier of exchange complexity, exchanges are equipped to handle fiat currencies as well as legally-mandated reporting obligations. This requires one more part time employee. Even at a conservative estimate, this Level Two exchange would arrive at a total monthly cost of $3,500 + Level One and Level Zero costs.
At the next tier, you would be looking at having your own dedicated development team. This involves at least two full-time employees. This could easily increase to five employees if you maintain a platform built without SaaS. This Level Three exchange tier would cost anywhere from $15,000 to $50,000 a month — in addition to the costs associated with previous tiers. However, the costs associated with this tier can be mitigated by leveraging a software vendor if you only require small tweaks and new features once per year. This would help bring down the price substantially, as it is a far cheaper option than hiring a full-time dev team.
If you are planning to operate a cryptocurrency exchange at a tier above level three, you should consider contacting us immediately. Our software, as well as our strategic partnerships with banks, brokers, and liquidity providers, will substantially lower your associated costs. We can help you save time and money while making the process as seamless as humanly possible.
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