The launch of a new cryptocurrency exchange has become one of the most lucrative opportunities available on the internet as part of the growing popularity of cryptocurrencies. In recent months, the demand for cryptocurrency exchanges has soared as global adoption has increased exponentially, adding millions of users onto the blockchain each month, resulting in a growing need for safe, fast and easy-to-use cryptocurrency exchanges.
By effectively developing a crypto exchange business, a company can capitalize on an endless amount of trading activities, multiple revenue streams and long-term scalability.
However, launching a crypto exchange is much more complex than creating a regular website or app, and you must consider items such as building a plan, compliance with regulatory requirements, designing and implementing a security strategy and operational plan. This guide is designed to help entrepreneurs break down this extensive process into small, simple steps to follow while creating your exchange.
Steps to Start a Crypto Exchange:
Discover the steps to launch your own crypto exchange:
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Discovery Phase and Market Research
It is important to consider customer demand as well as competing exchanges in order to develop a viable competitive strategy. Conducting extensive market research will help identify potential challenges and opportunities facing current cryptocurrency exchanges so that you may create your exchange to meet those challenges and take advantage of those opportunities.
This phase of development also allows you to analyse your current competitors, evaluate their geographic regulations, and define your target market.
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Determine your Operational Region
If you are planning on hosting a cryptocurrency exchange, then you must also determine which geographic region to operate in because each jurisdiction has different regulations regarding the buying and selling of cryptocurrencies, varying tax practices, and different licensing needs.
By selecting a jurisdiction that is favourable towards cryptocurrencies, your compliance costs and barriers to entry will be reduced significantly, enabling you to open your business without any complications.
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Choose the Type of Cryptocurrency Exchange
Centralized Exchanges (CEX), Decentralized Exchanges (DEX), Hybrid Exchanges, and P2P Exchanges all exist. Your selection determines your business model, offerings, and the technology that powers your exchange. CEXs typically generate more revenue, while DEXs offer enhanced user privacy and fewer regulations.
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Budget Calculation
Developing a budget for your exchange will give you an overview of the costs of developing the solution, managing your exchange daily, promoting your exchange and maintaining compliance with regulators.
It is essential to have a clear understanding of what these costs will be, because depending on the route you choose (Custom Built Exchange vs. Off-the-Shelf Solutions), you may incur a greater variance in pricing from one exchange to another. A well-structured budget can allow you to avoid any financing challenges that may come up during the later stages of development.
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Design the Architecture of Your Exchange
The Cryptocurrency Exchange Architecture consists of the following components: the Back End System (i.e., Trading Engine, Wallet Architecture, Liquidity Module, KYC Module, and Security Architecture), where the Work Flow, User Journey, and Technical Specifications for the Exchange will be established to ensure scalability and adaptability of the Exchange for future upgrades.
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Create and Verify UX/UI Design
User UI/UX plays an important role in both acquiring and retaining customers. Having a clear dashboard, quick navigation through the application, and a lower barrier to entry during sign-up makes a person feel competent about their trading activities. Creating wireframes, prototypes, and conducting UI tests will create the feel of being fast, smooth, and contemporary.
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Custom or White Label Solution
There are two choices for developing your exchange. Building your exchange from the ground up allows you to have total control of customizability over the process, but you will also spend more money, take longer to build, and have a higher risk. Alternatively, you can opt for off-the-shelf software/white-label solutions that will provide you with proven functionality, are less expensive, and can be deployed quickly to get into the market.
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Partner with Reputable Payment Processors
For exchanges that offer Fiat-to-Crypto, finding a reliable Payment Processor will help expedite access for the end user to their money and to comply with KYC and AML laws. This significantly increases user trust and improves the onboarding process.
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Hire a Legal Team of Counsellors
Since Cryptocurrency Laws vary from jurisdiction to jurisdiction, it is necessary to keep in touch with a legal consultant regarding Licensing, Compliance, Taxation and Global Expansion to reduce your risk of any potential litigation or penalties or to close your operation.
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Build Strong Features
When starting an exchange, your core features consist of: limit & market orders; multi-currency wallets; 2FA authentication; integration with Liquidity Providers (LP); API support; spot trading functionality; analytics & reporting; etc. The more complete and robust a feature set an exchange has, the more competitive it can become within the exchange space.
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Beta Test Thoroughly
A comprehensive beta test should be performed before a public launch to ensure that the operations and functionality of the platform will function correctly in a live market environment.
Beta testing needs a large variety of tests performed on the software. These tests include Performance Testing, Security Penetration Testing, Load/Stress Testing, and User Interface/User Experience Testing.
The issues found during the beta phase of testing will help improve the availability and reliability/stability of the system throughout its entire life cycle.
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Maintenance and Customer Support
Users and Customers should have the ability to reach out for support, 24 hours a day, seven days a week, about questions and concerns they may have in relation to the blockchain and its ecosystem.
Maintaining the Exchange to provide a quicker turnaround time for customers on requests for new and/or modified features and improve the speed of Exchange maintenance, and provide support for users is a must.
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Community Building and Network Effect
Most successful exchanges create large active communities, utilizing a range of resources, including Social Media, Content Marketing and establishing relationships with Affiliate and Influencer partners, all of which can increase Exchange credibility and website traffic.
A robust exchange will provide users with more liquidity, higher volume of trades, and sustainable growth over time.
Methods to Develop a Crypto Exchange:
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Developing a Crypto Exchange from Scratch
A custom-branded, feature-rich, and pre-built exchange solution that can be quickly launched will save you money on development costs and is based on proven architecture.
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White Label Crypto Exchange Solution
White Label Crypto Exchange Software has been a popular choice for many startups, as it does not require any prior experience in building an exchange.
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Ready-Made Clone Script
The use of ready-made crypto exchange script allows you to create clones of some of the best exchanges ( e.g., Binance, Coinbase, Kraken), easily and efficiently. The use of clone scripts can rapidly deploy your exchange while also being cost-effective and offering scalability for all types of entrepreneurs looking to quickly enter the market.
Benefits of Starting a Crypto Exchange as a Business:
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Multi-Signature Wallets:
Requires multiple approvals for transactions. This greatly reduces the risk of unauthorized access to funds by ensuring that no single person has the ability to approve a transaction without additional approval from others.
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Cold Storage Integration:
All users' assets must remain in offline storage. This prevents hackers from accessing user assets.
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Two-Factor Authentication (2FA):
As a secondary means of validating users, 2FA protects users with a second layer of security against unauthorized access attempts.
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End-to-End Data Encryption:
The process by which all sensitive information generated during trading activity and user accounts is encrypted before being sent from their device to the exchange.
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Anti-DDoS Protection:
The DDoS Protection will prevent an excessive amount of traffic from being directed at the exchange and stop its operations.
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KYC & AML:
The KYC/AML Verification System will verify users' identities and allow tracking of suspicious activities.
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Firewall & Server Security:
This protects the backend infrastructure of the exchange, including any attempts to penetrate the back-end infrastructure and/or unauthorized access to the server.
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Real-time Monitoring & Alerts:
Incorporated into the exchange to detect any unusual patterns, allowing us to mitigate risks before they occur.
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Regular Penetration Testing
The act of performing a regular penetration test assists the organization in not just identifying vulnerabilities in its environment, but also strengthens the organization's layered security through the use of simulated attacks.
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Secure API Integration
The Secure API Integration allows you to integrate third-party APIs without inadvertently exposing your Exchange to outside vulnerabilities.
Primary Challenges in Starting a Crypto Exchange:
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Regulatory Compliance
There is a lot of complexity and time commitment involved in terms of operating in compliance with government regulations regarding crypto within each country.
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High Development Costs
Developing and launching an exchange that is secure, scalable, and robust with features has a high degree of development expense associated with it.
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Liquidity Management
New Exchanges need to build sufficient liquidity to ensure an efficient order-matching and trading process.
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Security Threats
To compete with the advanced methods that threat actors are utilizing to breach the exchange, exchanges must defend themselves from those types of threats constantly.
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User Trust & Adoption
Building user confidence during the early stages of an Exchange is extremely challenging without the assistance of strong branding, security measures and transparency.
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Scalability Issues
As soon as an exchange launches, it must be able to handle high traffic levels and high transaction volumes without suffering from performance degradation.
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Payment Gateway Limitation
It is challenging to identify a reliable solution for providing access to fiat currency in and out of the Exchange due to the stringent requirements placed on banks by government regulators.
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Competition with Big Players
To distinguish themselves from the larger players in the exchange market, smaller exchanges must continually differentiate themselves and utilize aggressive marketing techniques.
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24/7 Customer Support Demands
In order to provide continuous customer service support, exchanges need a dedicated customer service department available 24 hours a day, 7 days a week, to service their customers globally and in relation to time-sensitive issues.
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Liquidity Partnerships
While developing relationships with liquidity providers or exchange partners is an ongoing process, smaller exchanges must establish those relationships early on in their business development efforts.
Conclusion:
Launching a cryptocurrency exchange is similar to most businesses in that you must have a plan and execute it effectively so that you can grow your exchange, maintain a high level of security for your customers, and comply with the various laws and regulations governing cryptocurrency exchanges. If you have some crypto exchange development idea in your mind, we can help you with that. Get in touch with our experts today!
FAQs
1. Is launching a crypto exchange profitable?
Blockchain and Cryptocurrencies will continue to be the most profitable ways to earn money for a Business that generates multiple streams of revenue through trading Fees, transaction Fees, etc.
A Financial Services Business can earn a significant amount of revenue by having an exchange because, as more and more users enter the Cryptocurrency Market, the Revenue that the Business generates from all of its Transactions will continue to increase.
2. Is launching a crypto exchange profitable?
White-label exchanges are the fastest way to get started and offer a lower start-up cost than custom development. Custom development provides complete flexibility, but it also requires the greatest amount of time and investment to get off the ground.
3. What are the advantages & disadvantages of choosing a cryptocurrency exchange script?
Scripts that have been developed specifically for launching exchanges provide a quicker, less expensive option for getting started, but do not provide the same level of customisation as developing your own platform from scratch. This means that if you intend to launch a business using cryptocurrency, these types of platforms will work well for you.
4. Is it safe and legal to use crypto exchange scripts?
In theory, if a reputable script has received proper licensing in your country and you are operating legally, then it is classified as a secure platform.
5. Do you know how long it takes to develop a custom-developed exchange?
The time frame to develop an exchange varies widely, but can take anywhere from 6 months up to 1 year or longer. However, if you buy a white label/ready-made exchange solution, it can usually be set up within 7 - 15 days.
6. How much does it cost to develop a crypto exchange?
The cost usually depends on the customization and other major factors. If you are planning to get a readily-made solution, the price will be budget-friendly, and for custom solutions, the pricing differs based on the needs.
