How to Start a Crypto Exchange?
The gateway into the future of finance
Exchanges are the gateway to the crypto industry and quite possibly the future of finance. Since the early days of Bitcoin, the appetite for crypto exchanges has only grown, particularly in places where a large number of the population remain unbanked. Many people have learnt to trade, they know what an orderbook is. For example large segments of the population within southeast Asia use crypto daily through exchanges, in fact it has become their daily driver when it comes to finance, “...young populations who inherently understand the technology”, Amy Zhao, lead at Ocular said.
For many young people in Asia and elsewhere, crypto exchanges are their first significant experience with online finance. These exchanges are often more user-friendly and have superior internet compatibility compared to traditional banks, which has made them popular among the next generation of users. Despite incidents like the FTX and Celsius hack, many people continue to use their local crypto exchanges because of their usability, speed, and user-friendliness of an email only setup.
For exchange business owners and/or operators, the settlement procedures with crypto are operationally much cheaper. They bring near real-time transactions between financial institutions, and ultimately streamline business processes with much less mistakes and less moving parts. An exchange system connected to the reliability of the Bitcoin and Ethereum blockchain makes a lot of business sense for startups and operators looking to future proof not only their finances, but allows the to explore cutting edge technology to stay ahead and find new ways to increase profits.
For the operators of crypto exchanges, the settlement procedures are significantly cheaper and more efficient. They facilitate nearly real-time transactions between financial institutions and streamline business processes, reducing errors and complexity. Using a blockchain-based exchange system, such as those built on Bitcoin or Ethereum, makes financial sense for startups and operators looking to future-proof their operations and explore innovative technology to stay ahead and increase profits. Connecting ones business to the blockchain can provide new opportunity to experiment new and profitability business models.
Crypto exchange businesses experienced growth, even during the tumultuous year of COVID-19, while most other businesses struggled. In fact, many crypto exchanges grew larger than well-known banks. For example, The Bank of Scotland reported revenues of $17 billion, while Binance the biggest crypto exchange reported whopping $20 billion! Are we seeing a trend here? If there is a trend, no doubt, the trend is to start an online exchange right away but before doing so a few frequently asked questions must be considered before starting an exchange.
Read on for FAQs around starting a crypto exchange!
Why do you want to start an exchange?
Why? The first and most obvious answer to why you’d want to start an exchange is to list, price and offer digital assets, tokens, and popular cryptocurrency trading to a demographic, region, or country that may not have access to the technology already. There are many places that remain largely unbanked or with insufficient financial services which are a perfect target market. This exchange list may help in locating countries that lack exchange infrastructure, however, a good Google on the topic will also suffice.
The point is, you’d want to start an exchange and target the marketing to where it makes the best business sense and where the technology is needed the most.
Another reason to start an exchange is if you are a token issuer of some kind. Launching a crypto exchange is a plus for token creators since popular token listing platforms like CoinGecko and CoinMarketCap require that a token be listed on at least 2 exchanges with sufficient information about said token. Therefore, launching a token on your own exchange allows you to accomplish these requirements and can help bypass the typical expensive token listing fees on third-party exchanges.
While critics might argue that cryptocurrencies have dramatically reduced in value from $50,000 to now $17,000 (as of Nov 2022), some like Tim Draper remain positive that changes are around the corner. Other results show that searches for the term Bitcoin in Google have remained steady with consistent interest below the surface.
Finally, crypto is no longer just about ‘crypto bros’ anymore. Traditional shops like Fidelity are now opening crypto markets and now pushing for commission-free Bitcoin and Ethereum retail trading. This has signaled other traditional financial firms to get into it which means much more visibility and usage of crypto which will in turn levitate every other crypto business.
What are the different types of exchanges?
There are 3 types of crypto exchanges, these being, the popular centralized exchanges or CEX for short, the decentralized exchanges or DEXs, and peer-to-peer (P2P) exchanges.
🌐 Centralized exchanges
These are the most popular type. They both act as the custodian of the wallets on the exchange and manage the trade. Some centralized exchanges will opt for a third-party custodian to take care of their crypto wallets. But typically they will custodian the funds themselves and the governing body will take care of the security of each wallet which means they will be responsible for upgrades or handling of disputes on the platform as well as managing blockchain nodes.
As a trade-off for their high speed, functionality, and high trading volume, such exchanges can run into security issues which makes the risk rewards high for those that run an exchange.
A centralized exchange will typically handle everything in one place and can control who can send money to whom.
Examples of such exchanges include platforms like Binance, Kraken, Coinbase, and HollaEx Pro.
Most business people that want to run their own business end up pursuing a centralized exchange model because centralized exchanges have many ways to generate profits, from coin listing fees, trading fees, or simple market-making services that can garner substantial profits.
🕸️ Decentralized exchanges
Unlike centralized exchanges, decentralized exchanges (DEX) are non-custodial, meaning users manage their own wallets and funds directly. The DEX however helps with the transfer of funds from one wallet to the other through their UI or platform website.
DEX's biggest advantage is that they offer users more control and privacy and can’t be censored, mean means the platform or DEX can’t block any fund transfers.
For actual trades or swapping of coins, each trade order is time-stamped on the blockchain allowing for transparency in terms of price. In fact, everything is done on the blockchain in an automated way with all actions bundled through multiple smart-contract.
The DEX itself isn’t holding any of the users funds, rather the DEX will relay any trade order information through the blockchain. This interaction is done via the user's wallet to another user's wallet.
However, since there is no escrow or central entity to govern transactions, these exchanges lack a moderator in cases when a mistake could occur. They also can suffer from low liquidity which can lead to low trading volume, which in turn makes trading extremely slow with limited. Ultimately prices can be accurate and the expense to trade will be quiet high for regular users that aren’t crypto experts. DEX also won’t work well with Bitcoin or fiat currencies which greatly reduces the ability of any businesses operator to generate profits.
However, most DEX operators can generate profits by providing some sort of token system. Another way they can make profits is through bot market-making services on top of their DEXs, taking advantage of new markets and their large spreads and low volumes.
🖧 Peer-to-peer exchanges
These types of exchanges are quite popular in places where exchange infrastructure doesn’t exist yet and/or there is unfavorable regulation. Platforms like Local Bitcoin show that peer-to-peer (P2P) trading volumes in India and South Africa have been consistent for nearly 8 years straight.
P2P exchanges however operate more like decentralized exchanges; instead of having an autonomous program or trading engine directly connecting one wallet to the other on the blockchain, peer-to-peer exchanges connect one trader to the other and govern transactions using escrow. An Escrow is largely a dispute resolution system and is typically a rather manual process handled by the operator and the members trading.
A traditional P2P exchange will typically force users of the platform to put up and hold a certain amount of crypto as collateral in their wallet for good measure. This collateral is then used when trades go awry.
Another option apart from using an online P2P system or website is for the users to physically meet up outside of the P2P platform to settle transactions themselves, thus avoiding/reducing escrow fees. Some services like MyCelium local trader can assist with this in-person transaction with their rating and optional built-in escrow system.
The business model for a peer-to-peer model is to charge a percentage of the transaction fee for the escrow/moderate service provided, and/or direct advertising on the platform. My example if someone trades 1 BTC and they use the escrow for safety, the escrow or platform itself can take 0.01 BTC from that transaction for providing oversight over the P2P trade.
What if something goes wrong? That is where the collateral gets used and can help reduce damages. But it is all up to the escrow to decide the solution and isn’t a sure system. This collateral cost however does make the cost of trading very high for all users, particularly those that only want to trade larger amounts which will require ever more collateral and escrow over watching services.
Why is it important for crypto exchanges to obtain legal counsel?
Complying with the different laws and regulations of the country where your exchange is based is crucial. In terms of obtaining legal counsel, there are several options:
- Hiring a legal team
- Adding an advisory board
- Using a third-party legal team
With rapidly evolving crypto exchange industry, laws and regulations, having a full-time legal compliance team can make the task much easier and it will help you to launch your crypto exchange in a country with crypto-friendly laws and regulations.
While countries like China have a history of banning crypto exchanges — countries like Georgia (in Europe), Singapore, and even El Salvador are known for having crypto-friendly laws and regulations. However, many of these countries can shift on a dime and so it might be prudent to set up in a country that is not known to change its laws as swiftly.
Many crypto companies have taken refuge in the Caribbean, amongst the Cayman Islands. If however you have capital, and paperwork in order then places like Zug Switzerland might be the best place on the planet for crypto businesses.
As a rule of thumb, no matter where your crypto business is established it is always good to follow the typical KYC and AML laws. The KYC laws around crypto have become increasingly important in safeguarding businesses and fighting against corruption and unlawful transactions. This means that your business should be structured in such a way that complies with these laws to conduct legitimate business.
KYC and AML compliance requires your business to collect basic data about your customers. That data can then be used in case your business is called upon by your local law enforcement who may need the data to follow up on any cases of financial crime or fraud.
Keeping a record of your users can also help safeguard your exchange business from hackers who would rather not give up their personal details. There are many third-party services that can be connected to the crypto business that can make collecting and recording these pieces of these data for you easily.
In most cases, the laws governing crypto are still in a grey area. As a result, it is often safer to first set up a crypto-to-crypto trading exchange, with no fiat currencies. Not having to deal with local fiat currencies will result in fewer legal headaches, not to mention is faster and extremely simple with a crypto exchange kit software.
How to create a financial plan for your crypto exchange?
It is important to plan your budget to make conscientious financial decisions for the growth of your business. Budgeting will also make it easy to choose the right method of raising finances. First, start by figuring out how your business will be funded. Here are 4 common ways:
- Self-funded: Founders inject capital into their own business.
- Venture-backed: Founders raised funds from venture capitalists (VCs).
- Angel-backed: Founders raised funds from either angel investors or friends and family.
- ICO: The team launches an initial coin offering (ICO) to raise funds.
- IEO: The team launches an initial exchange offering (IEO) to raise funds via an exchange listing.
- STO: The team launches a security token offering (IEO) to raise funds via to raise funds.
If you choose the VC route, VC firms will require that you prepare an extensive business plan (pitch deck) that details exactly what the big opportunity is, and why you are suited to take advantage of this opportunity. Additionally, VCs will want to see, at the bare minimum, a working prototype (MVP) of your product and traction (user growth). For this reason, the time that it takes to raise funds from VCs is considerable when compared to an ICO or an IEO.
Having at least an exchange MVP will make raising capital simpler. To create an exchange visit HollaEx and open up your exchange to the public to help gather capital. Some white label exchanges have a free testnet version.
ICOs, STO, and IEOs, on the other hand, may require less formal preparations, depending on the jurisdiction, and allow you to almost immediately start raising funds. That said, it is important to point out that like VCs, token crowd sale investors will want to see at least a minimum viable product (MVP) and a team with a solid track record. This is where using a white label exchange solution can be useful as it allows you to validate your idea by getting users and investors.
How to create a business model for your crypto exchange?
A business model is simply the plan or strategy you intend to use to make profits for your crypto exchange. Hence, the business model should outline how your business intends to make a profit. Part of this plan may go into great detail about user acquisition first, however, once users are onboarded and are consistently active on your exchange, then simply charging a transaction fee on every trade and operating the exchange normally is a sufficient enough business model.
However, if you don’t have the users yet, then you must make a plan to onboard them into your platform. One way to convince users to come is to provide a utility token and/or exchange token created on your exchange which will be used to incentivize users to use your platform. Your token on your exchange can then be used for:
- Trader voting: The right to vote on the future of the project, platform and/or exchange.
- Rewards buyers and sellers: Upon the completion of certain tasks the token can be issued as a reward for activity and loyalty to your platform.
- Gateway: The utility token can also be used as a gateway to specific functionalities on the exchange. For example, if a user holds enough tokens then he or she can access a certain function or rewards on the platform like lower trading fees or more info, or tools.
- Store of value: The token can be a store of value and used to transact outside of the exchange. This is the ultimate goal to provide a token that holds enough value through virtue of all of the utility and use cases built around it. Operating an exchange to facilitate these use cases can contribute greatly to the token's usefulness and thus its value.
To garner any benefit from tokens a substantial amount of work will be required, however, there is no better get working on your tokenomics than on your own crypto exchange platform. The token’s tokenomics design can start on the platform itself and as certain parts of the business strengthen so too can the token.
Another business avenue is that your exchange can act as an affiliate for other crypto-related services. This means, with enough traffic to your exchange, your business can earn commissions from recommending other crypto-related merchandise. Plus, not to mention, your exchange can charge trading fees on top of every transaction.
Note, in almost all these business revenue-generating examples a centralized exchange would be the only viable route to achieving any of these business endeavors, and thus it is important to consider what type of exchange you will operate first.
Having an exchange crypto wallet and/or user information and funds is the ultimate centralized place to create business models and revenue streams for your exchange operations. The options go beyond trading fees and into all the realms that traditional banks enjoy today and more.
The business model around exchanges is limited by your imagination, and really the more users you have the more options you will have. But before any of that is considered it is important to have these 3 basic exchange services, the first being crypto liquidity, the second being smooth deposits/withdrawals, and lastly transaction fees. These are the bread and butter of your operations and most be automated to provide a smooth user experience.
One key piece of information when starting an exchange is the importance of stablecoins, these can be USDT, USDC, or BUSD. The number of transactions between Tether (USDT) can’t be argued. USDT has become the de facto crypto world reserve currency and many exchange operators carve out a healthy business by using USDT as their native currency on their platform. This can be done by facilitating any business transaction on their exchange through an OTC or over-the-counter system (Learn what an OTC is in this video).
OTC deals are simply blocked P2P block trades that can occur off the exchange, but the exchange can still be used as a place to hold the funds and even automatically swap the funds. Many of these OTC trades are done in USDT, however traditional currencies like USD and EUR are always in-demand especially for clients that aren’t already in crypto, who might be looking for a way in.
It is the job of the OTC dealer to source crypto from cheaper locations and sell/buy with a small margin, the idea behind the OTC is to do this enough times, using the exchange as infrastructure to facility the trade, or as simply a trusted platform to establish the OTC relationships in the first place.
The secret of a good crypto business model is to simply allow for a smooth 24/7 consistent flow of money in and out of the platform. Minimum transaction delays and platform downtime.
Do that long enough and you build trust and a brand that people will depend on for their crypto financial service needs. It sounds simple but surviving is a big part of any successful crypto business. The formula is simple — just be consistent.
It is important to consider that there will be low trading days (crypto winters) and crazy ones (bull markets), but surviving should be the goal as it will be the only way to garner trust in your platform. That is where your business should be operating on an efficient, but tried and true exchange software. You don’t want to get bogged down with the technicalities and you certainly don’t want the exchange down for days. Instead, you need to provide a keen oversight over user onboarding, and marketing, while making sure there is a free and fair flow of money in and out of your exchange system (no stuck deposits or withdrawals). Your users, your customers, shouldn’t notice anything, and it is what they expect. For the exchange system to securely facilitate their transfer.
How to build a crypto exchange?
You can either build it yourself from scratch by hiring developers or purchase a turnkey white label exchange solution. Lean more about the cost benefits of a in this definitive white label exchange guide.
Building it from scratch
If you are looking to build a crypto exchange from scratch, then you will need to hire between 3 to 5 developers. These programmers will need to work on building your exchange for approximately 6 to 8 months.
You can read some ballpark figures on developer salaries in our other article here, which will help you ballpark the cost to build a crypto exchange from scratch.
To reduce costs you can hire remote developers, however, that may result in technical debt (also known as code debt), which refers to how low-quality code can hinder the future scalability of a product as a lot (if not all) of the code may need to be rewritten.
There are also other additional factors to consider, such as hosting packages, purchasing SSL certificates, ongoing product improvements, conversion rate optimization (CRO), and UX design.
Having said that, another alternative you could consider is to outsource the entire project to a web developer and design agency. In view of this, it may not be your best option and may end up costing you more because it is rare for an agency to adhere to deadlines. And, if your product ends up taking longer than expected, agencies may try to charge you more and threaten to stop work — leaving you with a half-built product.
Alternatively, you could also go with a full turnkey solution like the HollaEx, which allows you to set up a fully functional crypto exchange in minutes. This can greatly reduce the time since the entire platform has already been built to be used instantly. Ultimately, this option is a great way to test the waters while at the same time saving countless effort, time, and money.
What you need to know about crypto exchange liquidity?
Liquidity refers to the ease with which an asset can be exchanged for cash. In terms of crypto exchanges, the term refers to the speed with which a trader can complete a transaction in the most cost-effective way.
An entire market can also be considered to have liquidity if the assets therein can be sold and bought easily and at transparent prices. In regards to crypto exchanges, more liquidity is especially important as it reduces the chance of price manipulation because more money is required to effect price changes.
If you are looking to create a crypto exchange with a price equilibrium — then, getting liquidity right will make the exchange platform less susceptible to volatile price swings. This also creates a better user experience, since more traders are attracted to exchanges that can fill orders fast at predictable prices.
That’s because, with higher liquidity, the price spreads get tighter, resulting in more accurate and precise chart formation. On the other hand, a market with less liquidity leads to volatile price swings that skew the chart formations.
Market makers are pivotal to the liquidity of any exchange since liquidity is a function of the makers and taker traders on the exchange. A market maker can be an individual or a company with the specific role of standing ready to settle buy and sell orders regularly.
That said, dealing with liquidity is easily the next biggest challenge after going live with your exchange. HollaEx’s white label solution does however include liquid markets and will cover the market making for you. This might come at a small trading fee cost, however, is a reasonable place to start for any new exchange operator that doesn’t have the market making capabilities to manage their own exchange’s orderbooks.
How to decide on a payment processing system for your crypto exchange?
Payment processing or fiat on ramping is simply a means for your exchange to accept all sorts of money, from all sorts of platforms. The more the better, however realistically 1-2 on-ramps will suffice. This can be your business's bank account, or/and some third-party payment processor that you’ve to strike a deal with. These ramps will then handle the storage of fiat currencies and may help facilitate the trades.
Note, payment services can even help facilitate in the trade of other cryptocurrencies that are not yet on your platform, however, will charge a fee in some manner for those extra services. These fees can of course be passed on to your customers by increasing the trading fees.
One of the largest services that crypto platforms integrate with for fiat services is Silvergate, a US bank that is open to the budding tech industry.
However, it is important to understand, integrations and fiat systems can be extremely challenging to deal with and might mean some months before a working fiat on-ramp connection is ever made to your exchange. This is often where many business people underestimate the time and red tape. It is good to adjust your business model to account for the time and effort of integrating traditional monies and to consider more modern solutions like USDC or USDT for the purpose of on-ramping.
If however, your venture is ready to take on the challenge of fiat integration then seeking out a white label service that offers a fiat controls system that is crypto-friendly in allowing you to connect with APIs would be advised.
Again, obtaining a bank or on-ramp payment provided that will work with your crypto business can be challenging, but not impossible, as more established fintech services are warming up to blockchain technology. If a proper connection can not be established then using a manual payment processor is the other option. This could simply be posting your bank deposit info to your users at some pace or simply sharing it with them on individual bases. When your users send funds to your bank, you can credit (mint) an equal amount and give those credits (or tokens) to that users on your own white label exchange.
Note, that these third-party payment processors come with varying fee structures. In order for you to maintain a competitive edge and keep costs low, it is better to use a reliable payment processor with low transaction fees.
Custodia Bank is an up-and-coming bank that will mix traditional banking as well as digital assets custody.
One advantage of using a specialized fiat payment process for your exchange is that they can reduce any legal headache that may come from dealing with fiat currencies directly, and they also can be much faster and easier to work with.
With that in mind, shop around and be aware that some payment processors may have hidden fees in their contracts. Read your contract carefully, particularly any fine print in regards to the “settlement time.” Plus, make sure to have your legal team thoroughly investigate compliance with best practice rules and regulations.
What are some consideration around crypto wallets and crypto on ramping?
When it comes to crypto-assets such as BTC, your exchange software should already be handling your crypto wallet in some way or another. This could be an inbuilt wallet or an external wallet for your exchange. The crypto wallet should handle automatically all the crypto processing for deposits and withdrawals, and should allow your exchange to handle the flows of multiple types of digital currencies.
If you’re going to run a centralized crypto exchange, you will need a solid crypto wallet working behind the scenes so that your users can deposit funds. In terms of ease of use, exchanges that do offer a crypto wallet almost ways offer a much better trading experience and a better more convenient cryptocurrency support system for the exchange as a whole. This centralized exchange model as we mentioned earlier in this article has many advantages such as pure crypto wallet monitoring blockchain automation.
That said, it also comes with the responsibility of securing all those crypto funds and their private keys from hacks. The more private keys you store for the exchange the bigger a target your platform becomes for cyber hackers.
HollaEx provides a built-in crypto wallet directly and has been an exchange wallet technology provider and leader in the space since 2016, saving operators major headaches and concerns around their exchange’s security.
The other alternative is to allow your users to connect their wallet to your exchange and trade from their own wallet app with the assistance of a DEX and/or a peer-to-peer market.
How to market a crypto exchange?
Having good marketing, PR, and growth strategy can bring about incredible results in terms of making your exchange stand out. In view of this, it is a lot harder than it sounds. Both sales and digital marketing teams need to be aligned to draw in new customers.
Here are several strategies and tactics you can implement right now:
- PR: Develop relationships with key crypto journalists, podcasters, and YouTubers to generate media exposure for your brand. Additionally, you can also use PR software tools like Meltwater and Cision for contacting reporters at scale; or HARO for responding to reporters that are looking for expert commentary.
As an exchange operator, you can be an information source and get coverage for your business.
- Advertising: You can use traditional social ads such as Facebook ads, Twitter ads, and Google ads; or traditional crypto networks like Coinzilla and Cointraffic for banner and display ads. Not to mention, you can also syndicate your content via a platform like Outbrain and advertise to your key target audience.
- Conversion-rate optimization (CRO): Use multivariate testing (also known as AB testing) to test different variations for things like landing pages, email funnel copy, the color of buttons on a website, etc. This is especially powerful when used in conjunction with a landing page (LP) that has an offer (eg. a free ebook download) combined with ads (eg. Google ads).
- SEO: Rank for specific keywords that focus on user intent. You can use tools like Ahrefs and SEMrush to identify what keywords your competitors are ranking for, the search traffic, and intent (eg. if someone is searching for “buy bitcoin” you know they want to immediately buy crypto) behind that keyword, whilst also identifying new long-tail keywords (eg. what is the best crypto exchange in Singapore?) that can bring in traffic.
The reality is, there are actually 100s of things that crypto exchanges can do on the marketing front to grow their exchanges. Whilst, during 2017–2020, we saw a lot of ICOs with unconventional ways to market their cryptocurrencies like “airdrops” — the traditional ways of creating and growing a startup, do in fact apply to crypto exchanges.
Things like email funnels (ie. journeys), contributing to relevant news publications and authoritative blogs to share your ideas as a thought leader, viral marketing, PR stunts, billboard ads, TV commercials, outranking your competitors in SEO, refer-a-friend programs, etc. And ultimately, this presents a large opportunity for crypto exchanges to tap into.
What's the best software for businesses to start?
The best way start is to start with an exchange setup here, or reach out out to get a free consultation.
Experts with a tech background can start at https://github.com/hollaex/hollaex-kit
For more information on the crypto industry or for updates on HollaEx white label visit Twitter🐦
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