Earlier this year, the cryptocurrency market capitalization exceeded $2 trillion. Each of the cryptocurrency types is bought, traded, and sold through the usage of a cryptocurrency exchange.
In fact, as of Q1 of 2021, Coinbase, one of the largest cryptocurrency exchanges, boasted of 6.1 million monthly transacting users, and that only accounts for 10.89% of the total crypto user base.
If you are an individual or representative of an organization that has been following the latest trends and growth of the cryptocurrency industry, the chances are high that at some point you’ve considered the idea of building your very own exchange. Listed below are the six steps towards your goal.
Launching an Exchange-101
1. Picking the Type of Cryptocurrency Exchange
First, make up your mind about which exchange type best suits your needs. There are five major types of crypto exchanges: retailers, peer-to-peer (P2P) exchanges, decentralized, instant ones, and derivatives.
Each of these options has its own set of peculiarities you will need to study to successfully launch your platform. So make sure that you figure out what product you’ll be building first to avoid changing your mind too far down the line and having to re-do everything.
Mainly, you will be choosing between three major types of exchanges:
• Centralized: These are defined by the fact that all trades are processed via the mechanisms approved by authorities. Centralized exchanges operate as intermediaries.
• Decentralized: These do not use centralized intermediaries. They allow buyers and sellers to locate and transact with each other directly through on-chain connections.
• Hybrid: These combine the liquidity, functionality as well as customer support of centralized platforms, plus, they have the security and privacy of decentralized exchanges.
Ideally, if you would like to maintain control over your cryptocurrency exchange and get the highest level of security, opening a centralized exchange might be your best option.
If you plan on giving your customers the freedom to do everything themselves, a decentralized exchange could be the better option. However, it does entail some risks and other factors associated with it that you might not enjoy as the creator.
Hybrid exchanges are quite possibly one of the best types of exchanges you can open, as you’re getting liquidity, functionality, the option to provide customer support, and you also get a high level of security as well as privacy, which is an appealing aspect for a lot of crypto investors, both experienced ones and new ones just getting into the industry.
There are two ways you can build a cryptocurrency exchange: either operating on a global level or sticking to a specific region. You will need to get the necessary licensing as well as official approvals for your company to open the exchange in the first place. Pick accordingly, as every single government out there will have their own set of rules that you will need to follow as a currency exchange business, such as adhering to the KYC (Know Your Customer) verification, to name an example.
3. Software Requirements
When it comes to the software, there are three ways you can go on about this.
The first is picking a white label cryptocurrency exchange. A white label cryptocurrency exchange is essentially software that is pre-built for you with all of the features needed to run your project efficiently. Once you make the purchase, you can immediately run the product online and connect to the market with ease. You pay for the convenience of having it pre-built, which will save you a lot of time.
The second is picking a custom white label cryptocurrency exchange provider. This is quite similar to the first option, except that here, the company that built the software gives you the flexibility to customize things according to your specific needs. This includes features that are not created in the default packages, are typically pricier, and take a bit more time to complete.
The third is building it from the ground up. This option can be both great, and horrible, depending on the point in time that you decide to implement it. If you want to run to the market quickly, then this is not the option for you, as it will take the longest amount of time to fully develop based on your specifications. However, if you have the time, the team, or the knowledge, want to have the maximum level of flexibility and the most unique features, this might be just what you are looking for.
Keep in mind that you should always have the security portion of this as your top priority. Cryptocurrency exchanges need to be end-to-end encrypted, as it is important to store assets on hot wallets as well as cold wallets to reduce risks in spreading. You want to avoid all of the critical occurrences that can threaten security, as a breach will result in time and money losses.
4. Handling Liquidity
Any exchange, to operate efficiently, will require liquidity. If you do not have liquidity on your exchange, the customers will be hesitant when it comes to placing orders or depositing funds unless they see a full order book as well as trading activities occurring. This increases the level of trust of the end-user, it’s that simple.
You can use tools such as the TickTrader Liquidity Aggregator to connect and collect the best liquidity from an unlimited number of providers as an FX or cryptocurrency exchange aggregator.
You can join a whole network of cryptocurrency exchanges that will tie all of the liquidity together at all of the exchanges within the same network as well.
Another way to acquire liquidity is through a primer of prime (PoP) broker, which offers brokers or exchanges a trading liquidity pool that is based on top-rated exchanges. You can take advantage of this huge liquidity.
However, as an exchange, you ideally want to have multiple providers of liquidity and aggregate them into a single account. Liquidity aggregators can analyze a limitless amount of liquidity providers, and this allows traders to get the best deals on the market at any time. This is not available through the PoP method, however, you might get a lot more liquidity upfront.
PoP allows you to obtain prices only from prime brokers, while liquidity aggregation allows you to pull the best prices across the entire industry and offers a higher level of flexibility.
When talking about advertising, keep in mind that the cryptocurrency community, as well as the target audience, can be picky in this regard, and you need to acknowledge as well as avoid past mistakes so as not to risk getting ignored by crypto audiences.
Many social media platforms have specific rules, so you need to do your due diligence and research everything accordingly before putting your exchange out there.
6. Business Processes
The cryptocurrency exchange is a platform that facilitates the trading of cryptocurrencies for other assets, and these can be either digital or fiat money. They act as an intermediary between a buyer and a seller and make money through the commissions and transaction fees that are generated.
Build for Success
There are many ways through which you can start creating your cryptocurrency exchange. However, only you know what path you want to follow. It can (and will) take a lot of your time and money to make things right from the ground up, especially if you’re building it through custom means. However, you can also put your trust in professionals who have been in the industry for a while, and get your product up and running in a matter of months, not years.