Cryptocurrency and blockchain might have been game changers with respect to technology and record-keeping, and could, in the future, be game-changers when it comes to global finance. However, it's been just over 10 years since the first bitcoin made its appearance.
In these 10 years, the most practical manifestation of cryptocurrency and its offshoots is the cryptocurrency exchange. A cryptocurrency exchange is an inevitable outcome of a large number of cryptocurrencies in circulation today. CoinMarketCap recognizes about 6955 different cryptocurrencies adding up to the market capitalization of $324 trillion as of September 9, 2020. Although there might be different numbers stated by different authoritative websites, the number does not in any listing plan below 4500.
One of the most dubious attributes of cryptocurrency is its volatility, or in simpler terms, it's constant and massive fluctuations in their values against each other and even fiat currency. This attribute, however, has made it an ideal candidate for exchanges. Investors and analysts who can predict the movement of the price of one crypto asset against another can buy a crypto asset at a lower price and sell it at a higher price, making a good profit in this process.
A cryptocurrency exchange breaks the confinements of crypto to just tech enthusiasts. It had opened up the crypto space for common investors.
It has also created a new business opportunity beyond cryptocurrency mining. A cryptocurrency exchange business can make quite some profits in the business. Let us look at the nuances and intricacies of a cryptocurrency exchange in good detail, and also the process of a bitcoin exchange development.
What is a cryptocurrency exchange?
As the name implies, a cryptocurrency exchange or alternatively, a bitcoin exchange is a platform where traders can trade different crypto assets just like how a Forex works. The price of these crypto-assets is determined by market dynamics like demand and supply. The cryptocurrency exchange is, in most cases, a website or a mobile app.
How does a cryptocurrency exchange work?
As you may have inferred from the above paragraph, that there are a few entities involved in ensuring a proper functioning of the exchange - the buyer, the seller, and in most cases, an administrator.
The seller places what is called as a selling order on the exchange. These entries are made on a digital ledger called the order book. A potential buyer can search the order book for orders that match their requirements and pricing. When they find one, they can buy the crypto assets from the seller and pay the required price.
If the buyer cannot find a proper order, they can place a buying order which again is entered in the order book. An intelligent algorithm called the matching engine takes care to match the buying and the selling orders and execute the trade.
How does a crypto exchange make money?
The process seems simple and straightforward. What benefit does a cryptocurrency exchange have in this entire ecosystem?
A cryptocurrency exchange can charge a transaction fee for every transaction made on the exchange. The transaction fee can be as low as 0.01% of the total transaction amount. However, this minuscule percentage is perfectly complemented by the sheer volume of trading that happens on a cryptocurrency exchange.
Cryptocurrency exchanges have been known to make profits ranging in billions of dollars just from these transaction fees.
In addition, a cryptocurrency exchange can also make its profit from other avenues like IEOs (Initial Exchange Offering), coin listing fees, liquidity market-making, and advertisements. All these possible avenues make a cryptocurrency exchange business one of the most profitable and lucrative ones in the crypto realm.
How to create a cryptocurrency exchange?
Now that the profitability of a crypto exchange has been established, it is only natural that every crypto entrepreneur but want to build one. There are a few key steps involved in bitcoin exchange development.
The analysis stage
When we talk about analysis, we are talking about multifaceted research that we will need to do for your bitcoin exchange. There are various aspects that need meticulous attention including but not limited to the scope, the jurisdiction of incorporation, the kind of software that you will be using to power your crypto exchange, the licensing requirements, the establishment of liquidity, ensuring high security, and of course, marketing.
Every stage mentioned here involves a separate chunk of focus. However, even before you engage in execution, a lot of these aspects need to be planned.
The market - cryptocurrency is a buzzword in quite a lot of places. There are locations where cryptocurrency has already been established and the competition is tough. There are, on the polar opposite end, places that do not know about cryptocurrency. The first one will result in you spending a lot for marketing and the second one will result in no returns or at its best, a tough time to break the market. It is best to enter a lukewarm market where people are aware of cryptocurrency and its benefits, but at the same time, does not have a lot of competitors pining for the same audience.
The legal aspect - the laws that govern anything to do with cryptocurrency and blockchain have been quite shaky and uncertain. There are a few jurisdictions like the United States, Malta, Astoria and Gibraltar that have been quite welcoming and have completely regulated the crypto legal system. Countries like India have permitted cryptocurrency exchange businesses but have not excepted them as a legal method of payment. When you incorporate your business, it is important to know the regulations that you will need to comply with.
The software - the cryptocurrency exchange software can be considered the epicenter of the business. The software at large has a cryptocurrency wallet, an interactive user interface, and the matching engine. An administrator oversees all these functions and components. In most cases, the quality of the matching engine determines the quality of your cryptocurrency exchange. You can choose to engage in your bitcoin exchange development from scratch by recruiting your own team or by partnering with a bitcoin exchange development company. Alternatively, you can consider using white label exchange clone scripts.
The liquidity - although it is an abstract quantity, liquidity is one of the vital aspects crucial to the functioning of a bitcoin exchange. Liquidity, in the context of a cryptocurrency exchange, is the representation of the volume of trades that happen on the exchange. Building liquidity for new cryptocurrency exchanges might be a hassle. In this endeavor, you can simulate trading between artificial accounts created within your exchange. You can, alternatively, connect with another existing exchange through an API to reap the liquidity benefits of that exchange. As some recent exchanges do, you can also consider partnering with market makers or become a member of an exchange consortium.
Focus on security
Cryptocurrency exchanges can either be centralized or decentralized. Centralized exchanges, although they are easy to use, compromise on one of the most basic advantages brought about by the blockchain - decentralization.
Centralization brings with it a few inherent risks. If they need to be managed effectively, ensuring top-notch security is something a cryptocurrency exchange cannot compromise on. A few steps that can be taken to ensure security are:
Two-factor authentication - instead of using a single combination of credentials, an additional layer of security can be introduced, so the user is authenticated with a greater degree of assurance.
KYC/AML formalities - a cryptocurrency exchange is, in essence, a financial company. It is mandatory for every financial company to follow the Know Your Customer/Anti-Money Laundering formality to ensure that the profit does not get siphoned into malicious terrorist activities.
In addition to what is mentioned above, a few additional security measures like AES encryption prevention, XSS clean, Google ReCaptcha, session expiry, and device tracking can help in enhancing security.
The advanced features
Most crypto entrepreneurs would agree that at a time when a head-start enhances the possibilities of profitability, going for a white label cryptocurrency exchange script is the best way to kickstart your cryptocurrency exchange business.
What makes these white label solutions extremely attractive is the degree of customizability they offer. Incorporating a few advanced features that help distinguish you're offering from your competition. A few of these features are:
- Decentralized exchange trading atomic swapping
- Margin trading/leverage training and lending
- Bitcoin SAP
- Digital token trading
- Initial exchange offering
Marketing your Bitcoin exchange
All the effort put into Bitcoin exchange development will fall flat if proportional marketing isn't put in place. Marketing your cryptocurrency exchange should be a combination of crypto-specific efforts and generic digital marketing tasks.
You can participate in dedicated crypto forums like BitcoinTalk to talk about your cryptocurrency exchange. You can also make use of forms like Reddit, which has dedicated subreddits for anything to do with blockchain or crypto.
In addition, you will also need to in a few traditional practices like search engine optimization and organic social media engagement. Although the mainstream advertising platforms like Google Ads and Facebook/LinkedIn ads might not be available for cryptocurrency, you can still make use of a lot of third-party CPC services.
Considering the growing acceptance of blockchain and cryptocurrency now would be the right time for an aspiring crypto entrepreneur to start their cryptocurrency exchange business. As we have already seen, a white label clone script is the best way for you to launch your business at the earliest. The white label script also ensures that the product is free from but that might interfere with the most basic functions of a crypto exchange.
Most bitcoin exchange development companies, in addition to the script, also provide customization solutions, helping you assemble features that can help you stand out from the rest for your competition.