Today, there is a global expansion of the cryptocurrency market. This is a natural result, as the number of institutions that willingly include cryptocurrency in their strategies is also increasing. Moreover, even significant volatility of coins does not affect their decision. Inspired by the rapid growth of cryptocurrency exchanges, entrepreneurs are planning to revive the business by creating their own fintech.
530+ crypto exchanges are already registered on CoinMarketCap and their number is increasing every month. As for the daily trading volume on the five largest crypto exchanges, it has long “jumped” the bar of $20 billion. Both the numbers and the prospects look tempting, and it may seem that launching your own crypto exchange is a piece of cake. But in reality, success lies behind a complex process, with risks and pitfalls at every step.
The basic launch of a crypto exchange includes:
Let’s go through each point.
On centralized exchange platforms, clients deposit funds and trade in cryptocurrencies and fiat, having previously indicated their personal data. Personal data is required to pass the KYC procedure and secure transactions. The centralized exchange platform is responsible for client funds but can be affected by cyberattacks.
Decentralized exchanges are suitable for users who, for certain reasons, do not want to share their personal data. On exchanges of this type, peer-to-peer transactions are carried out: for example, loans, transactions, and so on. These financial transactions are carried out directly to / from the personal wallets of clients. Generally, DEXs provide much lower liquidity and tend to host less popular coins. This pattern is highly dependent on market fluctuations.
The license acquisition step can in no way be disregarded. Different jurisdictions introduce rules at their own pace, which, in turn, leads to ambiguity or blank spaces in crypto legislation. Nevertheless, with yet more financial institutions evolving in the crypto market, governments are to regulate the industry. As of now, more than 100 countries have applied financial regulations to crypto. Hospitable crypto countries are Germany, Georgia, Gibraltar, Lithuania, Malta, Singapore, Switzerland, the UAE, the UK. Keep in mind that it would be way more efficient to collaborate with a legal partner or choose a turnkey product with inbuilt legal support.
Since the popularity of virtual currencies is growing, to legally conduct a crypto business and profit, after acquiring a license you need to open a bank account to withdraw crypto. Opening a personal account has its own peculiarities and legal requirements in each country. Most foreign banks would require a KYC verification, identity authentication, license check, and the legality confirmation of paying sources. However, even in crypto-friendly states, like Malta or Singapore, as a non-resident, you may encounter difficulties. For a clean result, you can contact financial experts specializing in this field.
Providers of this type make financial transactions possible. In traditional fiat processors, the payment service registers and transmits the required data, validates the login information and authorizes the transfer of money by issuing confirmation to the parties involved. The cryptocurrency payment gateway works similarly to fiat, but with some peculiarities. Such gateways act as an intermediary between the buyer and the seller, and also send transaction data to the blockchain and register confirmations from the node. If necessary, money is exchanged for cryptocurrency or fiat.
To choose a processing company, consider the scope of activity. Some companies focus on a specific area, such as gambling or online stores. So, choose the one that suits your business needs. Also, pay attention to the accepted currencies. Fair enough, there is no need to enter thousands of them. However, customers should have a choice. Another important aspect is protection. Review the supplier’s previous records and request the results of a third-party audit.
The quality of liquidity is a significant criterion for comparing different exchanges. This indicator reflects the ability of an asset to be sold quickly with minimal monetary losses that appear due to the speed of sale. In the cryptocurrency markets, the most popular assets among investors are BTC/EUR, BTC/USD, BTC/ETH, ETH/EUR, ETH/USD and others.
Liquidity in the traditional stock business is provided by various market makers. The most popular are crypto marketplaces such as Finery Markets, other crypto exchanges and OTC desks. Suppliers create liquidity by making counter offers in response to traders’ market orders. It may seem that they will incur losses if they accept the offered price, but even a small loss is already built into their strategy and will pay for itself in the long run, because the trading volume is expected to be impressive.
A serious advantage for trading on the exchange market is one-time cooperation with many liquidity providers because then big orders of their clients wouldn’t have that effect on the spot price on that specific exchange. This increases the efficiency of financial transactions and reduces the risk of an undesirable shift in the order price for the worse relative to the price originally declared by the trader.
Exchange software must be efficient and high performed. Important criteria for choosing a solution are wide support for crypto trading instruments, currencies, indices, etc., as well as reliable risk management tools, a user-friendly interface, the flexibility of settings, and real-time data collection and analysis.
A separate point when choosing software for a crypto exchange is comprehensive IT support from a top-notch team of specialists. Choosing a service provider that has proven itself in the industry will allow the investor not to waste attention on HR and Product development affairs and other “working moments”, but to focus on developing their business and implementing business ideas.
Service providers with a high reputation, such as Merkeleon, offer products and cloud infrastructure solutions that fully meet the needs of the investor, allow you to earn on the margins on the liquidity received and reduce the launch time of the crypto exchange to 2 weeks. In addition, Merkeleon customers receive full technical support, which includes integration, scaling, configuration, cloud hosting, and bug fixes. According to the terms of the SLA (Service-Level Agreement), the client is guaranteed the fastest possible feedback: both technical and on all trading issues.
The profitability of the business directly depends on investments in advertising and promotion of the crypto-exchange brand. The core of any PR campaign is knowing the needs of the target audience, developing a marketing strategy, creating info content, working with advertising partners (media, influencers, etc.), as well as improving existing crypto exchange functions, and developing new ones according to user and market requests.
A standard cloud exchange will pull on 300 thousand euros. For this money, the client receives an infrastructure solution and a minimum budget for liquidity in the order book. Of course, the newly minted crypto-brand will not be able to immediately compete with the mastodons of the international exchange market. But with the help of well-chosen liquidity providers, investment in marketing and promotion will quickly put the exchange on a solid footing in the industry.
Cooperation with numerous liquidity providers through trading platforms such as Finery Markets reduces liquidity costs by several times. The reason is that the site model is not storage related. In addition, traditional crypto exchanges usually require а 100% budget investment in order to maintain a liquidity balance for trading pairs. In the case of Finery Markets, it is enough for a crypto exchange to have only 20% of the budget on its deposits in order to guarantee settlement. The rest can be invested in business development.
In order for the company’s budget to be planned correctly – without overdue debts at the moment and in the future, it is necessary to analyze liquidity indicators. This analysis is an important task of the enterprise in assessing the state of liabilities and assets, as well as in preventing possible risks of bankruptcy. We will talk about this topic in the next article.