How To Start A Cryptocurrency Exchange – A Beginner’s Guide

In modern market conditions, the world of cryptocurrencies is becoming more and more popular, which is deeply entrenched in social and economic processes. Few people can be surprised by earning Bitcoins and other virtual money. Almost every user seeks to understand the methods of earning or the benefits of the rate difference. 

In short, a cryptocurrency exchange is an electronic platform where virtual coins are traded. As in the case of traditional currency exchanges, the participant’s task is to make a profit, i.e. buy at a lower price and sell at a higher price. Exchanges are one of the key and most profitable businesses in the digital asset industry. They serve as an entry point and earn on a percentage of transactions and deposit/withdrawal of funds from the site. But their earnings also fluctuate greatly in relation to the situation. Bursts of activity are accompanied by the rise or fall of the virtual coins. And when the rates are stable, as they are now, then people who are interested in short-term one-time profits do not hang out on the exchange. Accordingly, there are no volumes. And those who use cryptocurrency as a tool, they don’t care about the course. When it’s stable, it’s even better for them. But often, competent managers and advanced businessmen are thinking about how to make a cryptocurrency exchange from scratch, also in such a way as to immediately cover their costs and get an impressive profit. 

Start Your Crypto Exchange

Thinking about how to build a cryptocurrency exchange set your mind that it is not going to be short. From idea to the final model, it took one or two years for experienced developers to make a thriving exchange. 

Thus, the consistency of your step is the following:

Step 1. Draw the model. An experienced trader comes to the idea with a crypto exchange model in his head.

Step 2. Assemble the team. A cryptocurrency exchange is not a resource that can be created alone, which requires a professional team. Wherever you find developers, there is always a risk of becoming their hostages and finding yourself in a situation where other teams will refuse to complete someone else’s code.

Step 3. Agree on the Terms of Reference (TR) and budget with software developers. This is a lengthy process, during which all team members must be at the same level, speak the same language and come to an understanding in all the nuances of TR and budget.

Step 4. Work on the project. An exchange is a complex product with a high level of requirements for functionality, security and competitiveness, so immediately tune in to:

• months of hard work;
• a bunch of inconsistencies and edits in the TR;
• hours of a scrum, online conferences and meetings;
• constant monitoring of all processes;
• endless transfer of deadlines;
• conflicts and showdowns.

If you successfully overcome all these difficulties, it is not yet a fact that you will eventually get what you have in mind. Quite the opposite: in the course of work, your project will radically change both in functionality and in price.

Step 5. Test the product. Bugs can turn into exchange hacks, so you need a team of independent testers. If you are confident in the reliability of your project, you can also entrust the search for bugs to your clients.

Step 6. Launch and promote your crypto exchange. It is necessary that as many people as possible from the target audience know about it, which includes:

• traders who make money on the difference in the rate;
• investors who buy crypto to invest in tokens;
• large cryptocurrency holders;
• startups who bring their projects to ICO.

Step 7. Organize reliable Technical Support. Do not forget to organize a customer support service taking into account many issues (from processing deposits to withdrawing accumulated funds, etc.).

Establish the operational scope of your exchange

When launching your marketplace, determine its operational scope whether it will function on a global scale or in a particular region. In any case, you will have to get the necessary licenses and permits.  In general, the attitude towards cryptocurrencies around the world is ambiguous: somewhere they are accepted, somewhere they are prohibited, as in North Korea. Asian countries consider cryptocurrencies as the future of money. In the US, attitudes towards cryptocurrencies vary from state to state. 

When choosing a suitable jurisdiction, we recommend paying special attention to its AML policy. Typically, the standard requirements lie in due diligence, regular staff development, reporting, recording suspicious transactions and notifying the competent authorities about them.

Create Liquidity on Your Exchange

When people talk about liquidity, they usually mean how easily a particular asset can be exchanged for another one or fiat money without sacrificing too much of its value. When applied to cryptocurrency exchanges, both aspects of this concept such as simplicity and cost are paramount as any trader wants the order to be executed as quickly as possible without enormous expenditures. Small exchanges and startups may experience liquidity problems simply because they have too many assets, but few people willing to buy at the offered price. 

The easiest and the cheapest way would be to enable some sort of liquidity aggregation where you can tie your exchange to other marketplaces via API and use their order books as well. It creates a very in-depth order book with thin spreads for your customers. However, if there’s lag, you’ll be taking some losses if a trade doesn’t go through. So, if you want to increase the liquidity of your crypto exchange, then we would suggest you join hands with the best liquidity service provider which offers high-end liquidity service solutions and makes your website more active. 

Cryptocurrency Payment Gateway

In commercial activities, the most important topic has always been mutual settlements. Mutual payments for goods and services in crypto coins are already gaining momentum and will soon become something commonplace, as it was previously with the Internet, mobile phones and other innovations. Processing payments in cryptocurrency is called crypto processing.

There are two models of how crypto processing works: “crypto-fiat”, when, as a result of conversion, the seller receives fiat money into a bank account, and “crypto-crypto”, when he receives cryptocurrency. If we are talking about the “crypto-crypto” model, without fiat money, then it is not necessary to register a company and open an account with an international bank. 

Opening a bank account is the hardest problem for cryptocurrency services. Banks consider cryptocurrency activities to be highly risky, therefore, with a 99% probability, they will refuse to open an account in Europe, even if your company has received the necessary licenses and strictly adheres to anti-money laundering laws.

Building the exchange software in-house

Of course, independent development of the entire project can be more budgetary. However, it will take a lot of time and knowledge. Most likely, you will have to assemble a team of friends or like-minded enthusiasts who are ready to get into the same boat with you.

1. Without software development, you don’t even have to think about how to create a cryptocurrency exchange. Therefore, if you have a lot of time (it may take 1-2 years), and you are one hundred percent confident in your knowledge and skills of the team when developing software, the following questions are to be noted such as:

• user`s account with the possibility of identification, as well as deposit / withdrawal of accumulated assets;
• gateways, connecting devices and bridges in order to connect traders and depositors to the service;
• an aggregator which is ready to handle a large number of requests and create its own currency;
• a trading core for generation of the order book, conducting transactions and calculating the balance.

2. Another important issue is the development of a simple, clear and intuitive interface that will be adapted for mobile gadgets. A separate application for smartphones creates additional points to the treasury of the attractiveness of your project.
3. There are two types of cryptocurrency wallets used on exchanges, i.e. cold and hot ones. Cold wallets are used to store the main assets of the exchange. Hot ones are needed to accept currency and withdraw funds to users.
4. The administrative panel on the exchange is the equivalent of business intelligence and management software. 

Pros:

• Confidence in safety;
• Getting an individual product;
• Ability to refine and improve the exchange.

Cons:

• Launching takes longer than installing a ready-made solution;
• The total cost of a turnkey cryptocurrency exchange is more expensive.

Read also Cryptocurrency For Dummies: What is Cryptocurrency and How it Works?

White label exchange software

“White Label” crypto exchange is a “standard” software that will allow quickly and inexpensively deploying a working cryptocurrency exchange, if desired, with your own design and under your brand. You will be offered a choice of several basic options that are technically ready to launch. As a rule, the main activity of a buyer of a white label product is not related to cryptocurrencies, but it may be similar in terms of topics. And the need for a cryptocurrency platform is dictated by the trend and demand.

Pluses:

• Quick setup and launch (from two weeks to two months);
• Low initial costs;
• Higher potential for increasing the return on investment,
• Lower costs for technical support and development in the long term (salaries, staff maintenance).

Minuses:

• There is no access to the source code, you cannot be sure that it is safe;
• Complexity of revision for specific requirements, it will cost more than the engine;
• Dependence on a third party.

Cryptocurrency Exchange Software F.A.Q.s

How much does it cost to start a crypto exchange?

Launching a marketplace “from scratch” will take 6-18 months and cost 250-500 thousand US dollars.

Documentation, registration and licensing goes from $ 0 (the absence of any registration, which is legally unsafe and does not inspire confidence among users) to $ 7,000 (a license, for example, in Estonia costs about $ 6,500, and offshore registration can reach up to $ 2,500).

Purchase or rental of equipment will cost from $ 50 per month (rent of unprotected hosting is highly undesirable) to $ 2000-$ 8000 (purchase of servers).

Hiring employees, i.e. programmers, cryptography specialists, a designer, a marketing specialist, testers, technical support specialists, exchange administrator fluctuates depending on countries and competencies. In general, the salary of specialists can range from $ 500 to $ 5000 per month.

In 2021, the following offers prevail on the development market, depending on the macroregions: for example, In Europe the costs vary from 50,000 to 240,000 € while in North America their range goes from $ 65,000 to $ 310,000.

“White Label” cryptocurrency exchange costs from 19 to 150 thousand US dollars, and the launch period will be only from 3 days to 2 weeks.

How much do crypto exchanges make?

2020 was one of the toughest years for the global economy and traditional financial system. Amid a massive pandemic worldwide, lockdowns and fear of a global recession, important changes have been taking place. More and more institutional investors have turned to cryptocurrencies as an alternative to traditional financial assets or hedges against major economic threats.

In recent years, competition among trading platforms has sharply increased. New trading projects and services have begun to enter the market, and in order to maintain users` loyalty, exchanges had to reduce commissions and come up with programs to reward regular customers. 

Today, exchanges disclose information about the structure of trading in a very limited manner: the share of market makers, breakdown by type and size of transactions, the use of their own position to ensure liquidity.

 The annual revenues of the largest exchanges can amount to hundreds of millions of US dollars. Daily trading volumes on them reach $ 1 billion ”.

How do crypto exchanges make money?

After the first question about how to set up a cryptocurrency exchange, the next main question of any investor is regarding the expected return on his investment. 

The commissions that the exchange gets from trading assets on its site and from their withdrawal can amount to 0.5%, but most exchanges take 0.1-0.2%. 

In addition to commissions for the transaction, the exchange receives income from the provision of leverage (margin lending).

The platforms also earn from the listing of ICO tokens, the fee for this service can go up to hundreds of thousands of US dollars.

As for the listing, small players add new coins mainly free of charge, in order to unwind and make money on traders’ deals. A certain trend now is the creation of exchanges for little-known and new coins that can be listed for free. The main thing for creators is to get a lot of clients and get commissions.

However, many cryptocurrency exchanges also have relatively free weapons when hunting for a client-partner programs. As a rule, they are used by cryptocurrency websites that post referral links to the partner’s exchange, receiving 20-30% of commission income from each attracted client who has become an active trader.

Additionally, the exchanges can earn money on the creation and sale of crypto robots for trading on the platform and holding training courses, lessons for novice traders.

The profitability of the site depends on its reputation and the quality of the implementation of the technical part. Reputation is created thanks to significant investments in marketing, and effective functioning is due to the honest and responsible attitude of the team to its project.

How long does it take to create a cryptocurrency exchange? 

If everything goes well, without serious force majeure and overlaps, then in 6-8 months you will be able to see the prototype/beta version of the trading platform, and in 9-18 months you will receive a mid-level cryptocurrency exchange developed in high-performance languages ​​C, Rust or others. (and not PHP). As a rule, experienced programmers who independently work hard and create their own cryptocurrency exchange come to such a business solution. If you are not a programmer and/or you do not have a team that includes professionals and traders, then your path lies in attracting a third-party development team.  “Out-of-box” software will allow quick, within 3 to 14 days, deploying your crypto exchange and launching it into operation.

An investor in a cryptocurrency business may face unpleasant surprises if he decides to attract strangers to the development. If, nevertheless, this happened, and unfamiliar people began to work on the project, in no case, after the end of the work and before the launch of the crypto exchange, do not break off relations with them since the new project will need improvements and development. If you do not want to pay money for a “pig in a poke”, and you need to be sure that you will receive a guaranteed result for your money, then ask the developers to confirm their competencies and demonstrate finished projects. 

Despite the fact that it is more and more difficult to enter this market, experts continue to believe in the bright prospects for this type of business. Basically, this is still a new industry and the competition is not as strong as in standard markets. The main condition, of course, is the maintenance of cryptocurrency rates at decent levels and the absence of a total ban on cryptocurrencies.

Disclaimer: Please keep in mind that the content of this article is not financial or investing advice. The information provided is the author’s opinion only and should not be considered as direct recommendations for trading or investment. Any article reader or website visitor should consider multiple viewpoints and become familiar with all local regulations before cryptocurrency investment. We do not make any warranties about reliability and accuracy of this information.