Starting Crypto Exchange Business 101
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Cryptocurrencies and cryptocurrency trading are no longer exotic phenomena. Even most conservative governments are beginning to realize that Bitcoin and its descendants will inevitably impact the economy of the future in one way or another. More and more laws focus on allowing cryptocurrencies and blockchain technology more freedom of application.
Despite the volatility of the major coins, the crypto-market is expanding, granting enthusiasts a space to develop the cryptocurrency industry or simply to profit. The easiest way to make money on cryptocurrencies is to invest in any coin of your choice and speculate on volatility.
That said, traders and investors will continue making money or losing it — crypto exchanges will win either way.
On one condition. Winning is only possible if the exchange founders take into account every possible nuance, whether technical, legal, or user-oriented.
So, how to start a cryptocurrency exchange in this day and age? What do you need to know to create an altcoin exchange? What resources are required to set up your own Bitcoin exchange?
This publication is a detailed and yet easy-to-use guide on how to start a crypto exchange and make sure that it has prospects for success. We will outline all the key steps to be taken by you as the future exchange business owner, as well as possible forks where key decisions will need to be made. Please feel free to follow the links provided in each section, where you can learn more about how to open your own crypto exchange.
1. Choosing the type of exchange
Choosing the type of exchange is the first and very important decision you have to make on the way to create a crypto exchange platform. Your next steps, including licensing, choosing the software, hiring specialists, and interacting with commercial entities, depend on this call.
There are three ways to set up a crypto exchange process — centralized, decentralized, and hybrid. Correspondingly, there are three types of crypto exchanges — centralized (hereinbelow CEX), decentralized (hereinbelow DEX), and hybrid exchanges. Let's study each of them separately.
CEX
The CEX has become a well-established solution in the cryptocurrency industry and represents a centralized, managed platform where buyers and sellers meet. In short, in the case of CEXes, the platform owner bears responsibility for user funds.
For clients, the advantages of the CEX approach include an excellent UI and UX, access to fiat gateways, a simplified registration process, the possibility to reach out to customer support, and a wide selection of trading pairs.
On the other hand, users of CEXes are not the owners of private keys, therefore, exchanges of this type are vulnerable to hacker attacks. Also, not all users are comfortable with providing personal data for KYC procedures. All of the above can be attributed to the disadvantages of the CEX approach.
As the future owner of a reputable CEX, your first concern should be to ensure the security of your exchange, as well as user comfort and liquidity aggregation.
DEX
DEXes are a complete alternative to CEXes. No company or other entity is responsible for your funds, and all transactions are executed via smart contracts and decentralized applications.
Hence, the main advantage of decentralized exchanges is that there is no security breach, provided that smart contracts are written properly.
On the other hand, users will have to put up with disadvantages such as low liquidity, poor UI, slow execution speed, lack of fiat gateways, and lack of customer support.
Those who decide to create a crypto exchange platform of DEX-type should realize that their exchange will be less attractive to beginner users due to the lack of customer support and fiat gateways.
Hybrid exchanges
Hybrid exchanges combine the advantages of CEX and DEX approaches. Users benefit from high execution speeds and quality liquidity, but keep their private keys with them. This type of exchange is still emerging, and it might take a few years to see how exactly they fit into the market, and whether they will be able to displace the traditional DEXes and CEXes.
Discover more about how each type of crypto exchange is operated, and the regulations imposed on CEX and DEX in different countries.
2. Choosing the regulation
As we mentioned before, investing in cryptocurrencies and tokenization of assets is a trend that is unlikely to disappear in the foreseeable future, so regulation and government control over the field will probably continue expanding. Therefore, anyone who asks a question like “How to start a bitcoin exchange business?” should also think about the jurisdiction their platform will operate in.
The choice of jurisdiction to start a crypto exchange determines the laws and trends, which include taxation, accounting, and business management. In different regions, the regulation conditions can vary greatly, from a clear set of regulations to the prohibition or complete lack of regulation. And while the latter option may seem attractive at first glance, remember that sooner or later this legislative void may be filled, and not necessarily in favor of your business, whether you intend to create an altcoin exchange or start a Bitcoin business with global ambitions.
For instance, Malta, Gibraltar, Switzerland, and Singapore are distinguished as attractive countries for those wishing to open a cryptocurrency exchange. However, legislation tends to change, so it is necessary to keep abreast of relevant developments.
The issue of integrating a payment system into your exchange is also related to jurisdiction. Any crypto exchange must have a set of tools to enable exchanging cryptocurrencies into fiat currency to generate revenue, so it is necessary to find out in advance which banks you can cooperate with to provide funds withdrawal and depositing.
Follow the link below to learn more about how crypto business is regulated in the European Union, and explore the first-hand experience of adopting crypto legislation.
3. Choosing the software
This is one of the fundamental tasks critical for starting a Bitcoin business with the prospect of sustainability.
The software ensures the execution of transactions on your exchange, wallet operations, depositing and withdrawals, and so on. Your choice here determines the cost of the software and the time it will take you to launch the exchange.
To begin with, let's take a look at the components necessary to set up a cryptocurrency exchange.
Cryptocurrency exchange architecture
Matching engine
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A matching engine is an application that combines opposite orders of buyers and sellers. Simply put, this is the core of your exchange responsible for registering orders, matching them, and executing transactions. |
Wallets
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A cryptocurrency wallet allows users to store and transfer cryptocurrency. There are both multi-currency wallets and those that can work with only one type of cryptocurrency. A working cryptocurrency exchange business model also requires fiat gateways for operations with traditional currencies, as well as a security system that will ensure the safe storage of user funds. |
Admin panel
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The admin panel monitors the entire system, including wallets and transactions. This tool also serves to configure the site and add new features that may be needed as your business grows. |
Trading platform
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A trading platform allows traders to place orders and manage their trading accounts. The user experience and, consequently, the popularity of your exchange among traders largely depends on the design of your trading platform. |
Client area
|
A portal where clients can register and verify an account, deposit and withdraw funds and use the available reporting and analytics tools. |
Matching engine
A matching engine is an application that
combines opposite orders of buyers and sellers.
Simply put, this is the core of your exchange responsible for registering orders,
matching them, and executing transactions.
Wallets
A cryptocurrency wallet allows users to store and transfer cryptocurrency.
There are both multi-currency wallets and those that can work with only one type
of cryptocurrency. A working cryptocurrency exchange business model
also requires fiat gateways for operations with traditional currencies,
as well as a security system that will ensure the safe storage of user funds.
Admin panel
The admin panel monitors the entire system, including wallets
and transactions. This tool also serves
to configure the site and add new features
that may be needed as your business grows.
Trading platform
A trading platform allows traders to place orders and
manage their trading accounts. The user experience and, consequently,
the popularity of your exchange among traders largely depends on the design
of your trading platform.
Client area
A portal where clients can register and verify an account,
deposit and withdraw funds and use the available reporting
and analytics tools.
Three ways to solve a software challenge
There are three main methods to approach the issue of setting up a crypto exchange software: developing it from scratch,
purchasing a white-label solution, or customizing the latter. Let’s break down every option, including pros and cons,
so that you can make an informed decision and create a crypto exchange platform to suit your particular business model.
Developing from scratch
Needless to say, if you want to be in complete control of the development process and make sure you own the rights to the source code, you have to go this way.
However, the main disadvantage of this model is that it usually takes at least a year to prepare for the launch, and probably another year to catch all the bugs and design flaws. You will also have to recruit an experienced development team and be prepared to invest large sums in R&D and security systems.
Purchasing a WL solution
A white-label solution includes all the components of the crypto exchange architecture described above. At the same time, you can be fully assured of a successful launch if you order the software package from a reliable vendor. A turnkey solution will cost you significantly less than in-house development, even if you include additional services with a monthly subscription like outsourcing the trading operations desk.
What you need to keep in mind here is that a white-label solution in its most basic state has much less flexibility than a proprietary one. That is why if you prefer to have more freedom to customize the final result and avoid huge development expenses, you should consider the last option on this list.
If you are interested in how the average cost of a white label crypto exchange solution is determined, you can use this service and estimate Soft-FX's White Label Crypto Exchange solution configuration. Please note that the resulting amount is not final and should be discussed with a consultant in case you have any doubts.
Customizing a WL solution
This is a compromise between strict resource optimization and the desire to customize the solution for your business’s every specific need. Experienced software vendors often offer to customize their turnkey solutions, which is a great solution if you need a little more market leeway but can't blow your budget.
Soft-FX provides an opportunity both to order an off-the-shelf solution and then customize it to your needs. Explore both options and choose what’s right for you!
Other methods
You can also use a solution that has already been developed and tested by an already functioning exchange or entrust a third-party company with the entire development process. Both of these approaches may entail fatal pitfalls, though, from conflicts of interest and complete technological dependence to uncertainty about the final quality of the product.
Areas that require special attention
If you decide to purchase a white-label solution to open your own crypto exchange, make sure you are working with a reliable vendor. Thoroughly research publicly available information, try to contact previous clients, and interview them about the quality of the solution they received.
We have compiled a short and practical checklist of factors and patterns that you need to look for when
communicating with a representative of your technology provider.
This set of tips can serve as your shield against unreliable and inexperienced vendors.
4. Finding a liquidity provider
Liquidity shows how easily and quickly an asset can be exchanged for its money equivalent. In fact, the success of an exchange business depends on the volume of liquidity. Clients will always choose an exchange with good liquidity that can offer a tighter spread.
Flow management from one or more providers plays an important role in providing quality liquidity. There are three key rules to follow when choosing a cryptocurrency liquidity provider, as this domain has its own particularities compared to the traditional currency market.
Analysis
It is necessary to evaluate existing providers (usually they are other popular crypto exchanges) in terms of cost-effectiveness.
Comparison
After analyzing and sorting out potential candidates, compare them in terms of the number of instruments offered, trading conditions,
availability of margin trading, and protocols used — Web REST API, Socket API, Fix API.
Final choice
All that is left to do is assess prices and commissions, and
then settle on the exchange that best meets your requirements.
There are two established ways of managing liquidity aggregation — the Prime of Prime method (or PoP) and independent aggregation of liquidity.
The PoP method
involves employing the services of a company that either collects liquidity from several sources or is itself a client of high-quality liquidity providers.
Liquidity aggregation
is the process of combining orders from different sources and sending them to the executors using a liquidity aggregator, a special software component.
PoP clients can benefit from large liquidity volumes, while those platforms that connect a liquidity aggregator gain the independence and flexibility to manage flows from different providers.
5. Promoting your crypto exchange
Once you have built the technological foundation for your business and implemented the launch, it’s time to spread the word about it.
As a rule, a marketing campaign to promote a crypto exchange involves several major activities, including direct advertising and brand
promotion, encouraging user activity, and improving the exchange's functionality.
All of these initiatives can be divided into two large groups.
Client acquisition
This set of activities is aimed at attracting new users and increasing their total number. Some of the tasks must be carried out by management, some can be outsourced to specialist digital advertising and promotion campaigns.
With the unique requirements of your business in mind, the stage of client acquisition may include strategy development, content creation, and publishing, advertising and collaboration with media, as well as event-driven offline PR campaigns.
Client retention
This category includes anything that can expand your users' trading toolkit and provide them with more options for creating strategies (introducing new coins, new order types, and trading tools like trading advisors), together with the expansion of investment opportunities (new formats, new indices, and futures).
Here are some examples of what you can do: email campaigns, affiliate projects, referral programs, user contests, and so on.
6. Sustainability of business processes
Aside from preparing for the launch and recruiting an initial customer base, you need to put in
place processes that will increase user loyalty.
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Customer supportOne of the principal factors that affect your reputation is customer support. A high-quality customer service that responds to inquiries on time can serve as an extra marketing tool. -
Asset management strategyYou should also take care of your asset management strategy in advance — several long-term plans will help you quickly adjust to any surprises that the market may present. -
RecruitmentRecruitment is also a crucial factor. Every qualified professional attracts recruiters’ careful attention, so the search for employees to fill key positions can last for months on end.
Customer support
One of the principal factors that affect your reputation is customer support.
A high-quality customer service that responds to inquiries on
time can serve as an extra marketing tool.
Asset management strategy
You should also take care of your asset management strategy in
advance — several long-term plans will help you quickly adjust
to any surprises that the market may present.
Recruitment
Recruitment is also a crucial factor.
Every qualified professional attracts recruiters’ careful attention,
so the search for employees to fill key positions can last for months on end.