The concept of a currency existing without the dependence of a centralized body is surely a technological and financial marvel. All the cryptocurrency and the blockchain have established themselves as amazing technology demonstrators, cryptocurrencies have fallen short in getting due recognition as an alternate currency.
This lapse in recognition, in addition to the legal uncertainties, can only be attributed to the fact that the value of any cryptocurrency is extremely volatile in the real world. This statement holds true even for bitcoin – the most prominent and the most accepted cryptocurrency! To understand the magnitude of sway in value, the bitcoin was valued at about $5000 on 1st September 2017, $2900 on 12 September 2017, and $19,700 in December 2017. While everything looked promising, the value again plummeted to $3300 in December 2018!
These fluctuations serve as a deterrent for any business and any country to accept cryptocurrency as a valid form of payment. This volatility, however, has opened up a completely new stream of a business called the cryptocurrency exchange.
What is a cryptocurrency exchange?
A cryptocurrency exchange, as the name implies, is a platform where people who possess different types of cryptocurrency can trade with each other at a predetermined value for each currency. The value is dictated by the market dynamics like demand, supply, and acceptance. In its function, it is quite similar to a Forex platform – the only difference is that instead of fiat currencies, it is the cryptocurrencies that will be traded between users.
Creating a cryptocurrency exchange presents a lucrative business opportunity for crypto entrepreneurs. Going with the casino-like philosophy of ‘the house always wins’, cryptocurrency exchanges can make a profit, irrespective of the trader making a profit or a loss.
There are different types of cryptocurrency exchanges like a centralized exchange, decentralized exchange, and peer-to-peer exchanges. Irrespective of the type of exchange using which you would like to create a business out of, there are certain ground rules to be followed, some mandatory, and some as best practices.
Study the jurisdiction before incorporation
Different countries have different laws that exhibit their varied perceptions towards cryptocurrency and blockchain technology. However, some countries have their legal systems designed in such a way that they only prevent using cryptocurrency as a mode of a transaction. There might not be a law that prevents people from running either a crypto development company or a cryptocurrency exchange.
Before you incorporate your company, it is important to find out where your company will be incorporated and if it is legally allowed to incorporate a cryptocurrency exchange business in that jurisdiction.
Have a proper legal counsel handy
Just because a business has been incorporated compliant with the legal requirements of a country does not mean that it is going to be a smooth road from thereon. There are certain regulations that need to be uncompromisingly followed. In addition, obtaining proper licenses to operate is necessary not only in the jurisdiction of incorporation but in every place the company plans to operate at. Any lapses in legal compliance might result in heavy losses for the company, both in terms of money and reputation. It is highly recommended that you hire a legal cryptocurrency exchange consultant to help you in this regard.
The legal team should not only be present at the start of the exchange business but should be there throughout the running of the business. Cryptocurrency laws are nascent right now, and they are bound to change. The legal team should be up-to-date with all the latest news on the crypto-legal front, and ensure that your company and your business establish their compliance on an ongoing basis.
Acquire enough funding
A cryptocurrency exchange software is a capital-intensive investment. Partnering with a reputed cryptocurrency exchange development company will surely get your business the best possible exchange software, but it is going to cost you proportionally. In addition, there are also costs involved in marketing your exchange and providing ongoing support for your customers. Therefore, it is important to ensure that you have the essential capital it requires to run the business. There have been a lot of instances of cryptocurrency exchanges ceasing operations only because they ran out of capital when they reached a certain stage.
Partner with the right company
A cryptocurrency exchange software is not just a piece of technology. Your cryptocurrency exchange is a business that requires a holistic understanding of the technology, the economics, the market, the legal manifestations, and the business. It is important to partner with a company that will function not just as a development team but more as a business partner.
Your cryptocurrency exchange development company should be able to suggest the right solution for you. Sometimes, it might be a better option to go with a white label cryptocurrency exchange software. Sometimes, it makes sense to invest a lot of time and money in building your crypto exchange from scratch. Your crypto exchange development company should help you in making the right decisions regarding your investments in technology.
To complete the entire cycle, your development partner should also help in beta testing your cryptocurrency exchange and launching it.
One of the foremost factors that investors look for before trading in a crypto exchange is the liquidity that exchange. Classically, liquidity is defined as the ease with which you can convert an asset into cash. In the context of a cryptocurrency exchange, liquidity refers to the volume of transactions that happen on the exchange. It might not be possible for a new exchange to showcase big volumes. To circumvent this challenge, the exchange can either consider simulating transactions right within the exchange using bots. Alternatively, they can also tie up with another exchange using an API, so they can benefit by factoring in the liquidity in that exchange.
Partnering with a payment processor
With respect to any normal business, finding a payment partner might not be a big hassle. Almost all banks will be ready to accommodate those businesses. However, for a business that deals with cryptocurrency, performing due diligence before finalizing on your payment partner is of paramount importance.
Some banks might not be willing to partner with any crypto business. There might be instances when none of the banks in your jurisdiction might fit your bill. You will also have to take into consideration factors like compliance with PCI-DSS and their settlement time. Therefore, finding the right payment partner ties up with the first step of creating your cryptocurrency exchange.
Security and immutability are direct consequences of decentralization, which is considered one of the initial properties of blockchain technology. However, there is a certain degree of compromise in this decentralization when it comes to crypto exchanges, and especially the centralized exchanges. This makes these exchanges lucrative targets for hackers are people with malicious intent.
To protect your exchange and investor data, you will need to ensure top-notch security for your cryptocurrency exchange. Simple steps like two-factor authentication and multi-signature wallets can go a long way in enhancing the security of your exchange. In addition, it is highly recommended that you complete the KYC/AML and formalities with all your customers, so you know that there are no malicious hands who can access your exchange.
Invest in marketing
All the efforts put in to create your cryptocurrency exchange would go down the drain if you do not invest in marketing the exchange. Your cryptocurrency exchange marketing efforts should be a combination of content-based participative marketing and paid advertising.
On one side, you can participate in forms and also inform influential platforms like Coindesk and BitcoinTalk. You will also need to mark your presence in channels like Reddit, Telegram, and Slack. There are certain crypto-exclusive marketing methods like running bounty programs. In addition to those, classical digital marketing methods like search engine optimization, paid advertising, and social media marketing should not be forgotten.
Provide customer support
Customer support should be available for your traders and investors across multiple platforms including but not limited to phone, email, and chat. Since your business is likely to cater to investors across multiple time zones, your customer support should be available around the clock.
If possible, you should also consider integrating customer support into social media.
Cryptocurrency exchanges present one of the most promising and lucrative avenues for making a profit from this new technological manifestation. Should be one of those aspiring entrepreneurs who would like to create a crypto exchange business, all you need to do is get in touch with a cryptocurrency exchange development company. They will take care to understand your requirement and also help in finding out, if need be, the right white label cryptocurrency exchange software. They will also ensure to customize the software in line with your business requirements.