How To Build Cryptocurrency Exchange?
When Bitcoin was first created in 2008, exchange of coins occurred between cypherpunks that used to mine them. Back then, mining bitcoins was simple since energy costs and the hardware required could easily meet the demand. As mining got more complex and thus more expensive activity and with an increasing value of the coin, it became necessary to create exchanges where users could easily buy Bitcoin with FIAT currencies.
Before we move on to crypto exchange development, let's look at some facts:
- In 2010, the first Bitcoin exchange bitcoinmarket.com was created and paved the way to the great business potential we experience today in fintech.
- There are over 200 crypto exchanges currently operating, with the top 100 producing a 24-hour volume between $22.5 million and $3 billion each.
- The top 10 exchanges alone generate a turnover of over $1B per year, according to Bloomberg.
- Cryptocurrency exchanges have facilitated independent retail trading.
- An exponential number of users can now trade 24/7, improve their technical analysis knowledge and in the best cases take home some decent gains too.
- It is estimated that until June 2019 there were 43 million cryptocurrency accounts ID verified (active traders) globally.
That’s why crypto exchanges have become more popular in recent years and will have a big space in the financial markets of the future.
How to build a cryptocurrency exchange
Rules and regulations are still a blurry area in most countries as this business is for most part treated as a novelty. However, provided the legislation is clear around building an exchange, from a practical perspective creating and promoting a platform is not such a haunting task as it might sound. And, considering that they make profits regardless of whether cryptocurrencies grow or decrease in value, they surely are a worthwhile business.
Cryptocurrency exchanges can be categorized into centralized and decentralized platforms. Here are some facts about the first ones:
- Currently, about 99% of cryptocurrency transactions are being handled on Centralized Exchanges that provide higher liquidity and a greater volume of trade then their decentralized counterparts.
- They are controlled by the owner of the platform and act in similar ways to traditional stock exchanges. Users deposit funds directly on the exchange and do not own their private keys. The implications are rather enormous since, despite growing security measures, they can be hacked and users can lose all their money on such an exchange platform.
- Security of a cryptocurrency is a main concern for any exchange, however. Crypto enthusiasts will always remember the infamous hacking of Mt Gox in 2014 and, more recently, of major exchange Binance in 2019.
- Are independent of intermediaries and are not owned by any company.
- Since users have total control over their private keys, funds are hard to be stolen by hackers. Instead of being released by centralised wallets, transactions are verified by digital signatures, that’s what causes slower transaction operations.
- Users' private information is not stored in the exchange, giving traders more anonymity and privacy.
Even the creator of the first commercial antivirus software John MacAfee is a strong supporter of decentralised exchanges. His main take is that they are permission-less therefore cannot be shut down by a government and provide total freedom of exchange in a secure environment.
Different solutions available to set up an exchange
Built on the blockchain, a white label cryptocurrency exchange solution is a software developed and then sold to multiple companies that can further enhance and customize it according to their business needs. Such software would have been pre-tested by the development company and therefore pre-market inspections and supervision are not needed. Along with an encrypted hot wallet, a multi-signature and multi-currency offer, white label solutions can provide SegWit or Segregated Witness, which literally means separating transaction digital signatures from the Bitcoin blockchain in order to free up space for more transactions and improve scalability.
They are very cost efficient as a fully-built exchange can be purchased at a significantly lower cost and in less time than a custom product built from ground up.
In the world of cryptocurrencies, an open source solution should be a key attribute. The software development script will be publicly accessible and free to use with a peer-to-peer structure that eliminates intermediaries from transactions and operations. As no entity controls the software, anyone globally can contribute to the code stimulating innovation. Most times open source developers are also the beta testers for the software, therefore bugs are more easily spotted and fixed before they can be exploited by hackers. Transparency in the work on the code basically results in a more enhanced security for the users.
Custom Software Development gives full freedom to tailor a unique product. Unlike white label exchanges, it will offer full control, better and richer customisation, the chance to provide better in-house technical support, and a more sophisticated design. The implication is that the solution will be more expensive and will be built and delivered within longer timeframes.
What should be taken into account when creating your crypto exchange?
Being a relatively new business, crypto exchanges are yet to be fully regulated in many places around the world but some measures are typically the same or similar everywhere. These include compliance to KYC, AML, and CFT regulations.
Seeking legal advice is necessary especially as cryptocurrency laws are rapidly evolving globally, so it is very important to keep the exchange up to date by either hiring or outsourcing a legal compliance team.
Proper licensing will need to be obtained in all jurisdictions in which the company plans to operate, not only to be fully compliant to regulations but also to bring legitimacy and confidence to users, in addition to potentially give access to more banking options.
It’s also worth considering taxation before registering a business in a certain location, because the different corporate tax structures will have different effects on after-tax revenue.
Certain jurisdictions such as Gibraltar, Malta, Thailand, Philippines or Japan, among others, have passed laws that specifically cover crypto wallets and exchange of crypto to fiat or crypto to crypto.
Locations like Estonia in Europe and Singapore in Asia-Pacific offer the best scenarios for any cryptocurrency business. Crypto exchange activities are regulated without complex bureaucratic processes, provide the most innovative framework in technology and the most affordable options worldwide.
Initial costs for developing and launching an exchange may vary from €100,000 to €150,000 as a bare minimum, including the cost of technology, hosting, legal advice, government registration and advertising.
To build a cryptocurrency exchange will typically take 3 to 6 months.
While a backup budget is required for every business start-up, other costs to consider for the long-running of operations include wages to the employees, consistent legal compliance, maintenance of Intuitive User Interface, Trading Tools, Order Book, Escrow system, Wallet, Payment Gateway Integration, Security Protocol Implementation.
Software development partner
Finding the right cryptocurrency exchange partner is of vital importance. The company you choose to partner with needs to be able to meet all business requirements along with being a reputable provider that can offer strong security and a cost effective implementation.
Ulam Labs builds blockchain platforms on Python which ranks among the top 5 programming languages and takes security concerns very seriously. The development company can help by building exchange platforms from scratch and with highly efficient team support.
Partner with a bank or payment processor
A bank or payment provider are necessary to process payments via fiat currency.
Other than offering more trust to clients, partnering with a bank which has fast clearance and settlements of funds will provide convenience to customers.
Partner with other exchanges for increased liquidity
A lack of liquidity is mostly what puts off traders from joining an exchange, whereas a full order book and trading activity are seen as a trustworthy source.
A liquid market is also more stable. As a matter of fact, a less liquid market is more likely to have prices affected by a large trade and it can be more easily manipulated. Liquidity is also essential for faster transaction times and more accurate technical analysis.
The best way for a startup is to partner with other exchanges that can provide a good basis for increased liquidity. Most exchanges also start by launching dummy accounts and simulate trades among them.
Beta Testers behave as end-users enhancing the quality of the product further by suggesting ux and functional improvements and verifying business logic, usability, and reliability of the trading process. They help uncover any bugs or issues so they can be addressed before a general release. In order to attract beta testers exchanges usually offer advantageous trading fees or other perks. This way they also acquire more users while testing the service for free.
In the era of the internet and social media, marketing a service has never been easier and more cost-effective.
- Marketing actions can include connecting with major players like Coindesk, Cointelegraph, creating engaging pages on sites such as Facebook, Twitter, joining crypto communities like BitcoinTalk.
- Podcasts, nowadays, are great options to easily engage with a targeted user base.
- Add Bug Bounty Program, LinkedIn groups, Email Campaigns, Affiliate Marketing Strategy, Paid Ads and a marketing campaign is as complete as it could be.
Listen to the podcast: The Differences Between Public Blockchains
While customer support is the last step in the creation of a successful crypto exchange, ability to excel in this area will determine long-term success. Customer complaints and technical issues should be resolved satisfactorily and in a timely manner with the help of platforms like ZenDesk and use of live chats along with other traditional emails and phone calls.
Since trading cryptocurrencies is a 24/7 activity, customer support must be organised around full-time assistance. Too many users dismiss trading cryptocurrencies due to the difficulty in understanding public and private keys and the facility to lose them. An exchange with an outstanding customer service that can help non-techie users will go a long way in emerging as a favourite platform within the crypto community.
In essence, building a crypto exchange business is not difficult nor particularly costly considering the risk - reward potential of this niche fintech business. Due to the growing number of exchanges available it becomes more crucial than ever to shine in all areas highlighted above to emerge in a highly competitive market.
Developing cryptocurrency trading platforms equipped with customized wallets is one of Ulam Labs key skills along with helping clients throughout the whole process from building to delivery and enter-the-market strategy. Get in touch to develop your own cryptocurrency exchange.