I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
Given the ongoing scandal of the FTX bankruptcy, those passionate about cryptocurrency might wonder: How do exchanges keep failing?
Why do these sometimes infallible platforms end up collapsing due to poor management time and time again? While the human element of a project cannot be ignored, there is a lot to learn from the past about what makes a good exchange.
Our steps below can help you learn from past examples and keep a project focused on delivering great crypto services.
Read on to learn how to start a cryptocurrency exchange.
Types of Crypto Exchanges
Any crypto exchange is effectively a currency exchange with different coins and tokens. However, not every cryptocurrency exchange platform operates the same way.
Platforms have different designations depending on their governance:
- Centralized exchanges: Also called CEX, these exchanges have a business or organization that determines how the exchange operates.
- Decentralized exchanges: Also called DEX, in these exchanges, governance token-holders vote on changes to the platform with blockchain technology.
- Peer-to-peer (P2P) exchanges: These platforms allow users to exchange coins with each other without an intermediary.
9 Steps to Creating a Crypto Exchange
If you want to make a cryptocurrency exchange or trading platform, follow this step-by-step guide:
- Perform extensive market research: Looking at the different exchanges on the market right now can help exchange developers determine solutions to problems inherent to other platforms.
- Build from scratch or partner with a white-label exchange: Entrepreneurs need capital to start projects, meaning a bootstrap effort or funding from a reputable organization will help get the project launched.
- Decide on your crypto exchange business name: Your digital currency exchange will need to have a name that stands out and helps customers understand what your platform is about.
- Choose countries and languages to support: This choice affects not only the language options for your platform but also compliance with Know Your Client (KYC) laws.
- Decide on which coins and trading pairs to support: With thousands of options outside of Bitcoin and Ethereum, your cryptocurrency exchange business will need to decide what trading pairs to support to prioritize market makers for development time.
- Ensure high levels of security: Given exchanges operate with people’s money, any successful exchange must ensure a secure environment to maintain trust.
- Launch and promote your crypto exchange: Once your platform goes live, market to your target audience based on the features and trading pairs you offer.
- Onboard new customers and provide 24/7 support: While user-friendly features and user interfaces (UIs) are critical, having a legal team and customer representatives can also help customers with any confusions or difficulties.
- Continue growing and improving functionality and user interface: No project is perfect at launch, so use your customer feedback to improve your features and presentation over time.
Cryptocurrency Exchange Must-Haves
The best exchanges have some or all of these features:
- User login: Usernames and passwords are common features that help secure customers’ funds.
- Accessibility: Features that can help those with access problems, such as screen readers or colorblind modes for charts, can increase an exchange’s reach.
- Security: Frontend and backend security features are necessary to protect against cyber-attacks, phishing attempts and so on.
- Customer service: Centralized exchanges can offer email, phone or live messaging support to customers.
- Asset offerings: Cryptocurrency options help to attract more customers as the exchange becomes a way for customers to get into or out of different projects.
- Low fees: The lower your fees, the more customers will want to exchange on your platform.
- Liquidity: High liquidity guards against bank runs or similar events, where the price of a coin or token swings due to trade volume exceeding the supply of crypto.
- Order book system: Automatic order books allow trades to happen when buyers and sellers match their price offerings, reducing the workload for platform developers.
- Crypto wallet integration: Many exchanges allow customers to trade from connected software or hardware wallets.
- Admin control panel: This backend feature will allow your website’s admins to fix issues and collect data that can help improve operations for the future.
- KYC/Anti-Money Laundering: Regulated exchanges need to follow these rules to offer services to customers in some countries.
- Margin trading: This feature allows users to trade outside of the base value of their crypto, increasing their chances of making big returns and improving your fee revenue.
- Staking: Some crypto exchanges use Proof of Stake protocols to confirm blockchain transactions, meaning they can offer these services with customer funds for a fee.
- Crypto portfolio analytics: Data such as portfolio growth over time can help customers decide if their portfolio works the way they want it to.
- Fund deposit/withdrawal: Customers need some way to exchange their fiat currency for crypto, meaning exchanges with this feature can be an on-ramp into the world of crypto in general.
- Two-factor authentication: This is another reassuring feature that ensures customers are who they say they are when they log into an account
- Payment gateway: Outside of Automated Clearing House (ACH) deposits, working with a credit-card gateway can help customers get into crypto.
How Crypto Exchanges Make Money
As businesses like any other, exchanges need to make money to pay employees, cover costs and make some profit.
This is achieved through charging various fees on the platform. Some examples are:
- Trading fees: When a customer makes a trade, a small percentage of the trade goes to the exchange for setting up the trade environment.
- Margin trading: When margin calls go out, the exchange makes money from the collateral put up for the loan.
- Withdrawal fees: These fees are a small amount taken out of the total funds withdrawn from the account.
- Fiat deposit fees: When an exchange accepts a fiat deposit, it may charge a handling fee.
- Listing fees: New projects pay these fees to be listed among the exchange’s offerings.
- Crypto staking: Staking takes dedicated hardware, meaning an exchange can invest in hardware by collecting customer funds and rewarding staking payouts to customers, taking a small fee for the convenience offered.
Why Launch a Crypto Exchange
While it might seem that there are enough crypto exchanges out there right now, that doesn’t stop some entrepreneurs from designing new platforms.
There are several possible reasons for this:
- Increasing demand for crypto trading: With the general increase in crypto trading over time, it seems that the demand for platforms offering exchanges will increase as well.
- Straightforward business model: The crypto exchange business model doesn’t require variables such as supply chains or manufacturing space, potentially making the business more transparent and easier to set up
- Local independent business: It is possible to create an exchange for a local area, such as a small nation or region of the world.
- High business valuations: Because exchanges tend to hold a high amount of capital, they receive high valuations, making exchanges an appealing investment.
Should I Start a Crypto Exchange?
Making your own cryptocurrency exchange is a tough job. As the crypto space continues to mature, each year, everyone learns more about what does and does not promote success.
Features that were new only a few years ago become rote inclusions for new projects today.
Before setting out to create a new exchange, ask yourself: Is there a gap in the market? Will you be able to deliver on the promises you make to customers?
Positive answers to these questions will set up a project for success, ensuring its focus is centered on what matters to the market.
Here are some of the most common questions about making a crypto exchange:
How much does it cost to start a crypto exchange?
Though a virtual business, a crypto exchange can be expensive to create due to developer time requirements and hosting costs.
You might need tens or even hundreds of thousands of dollars even for a small, decentralized exchange based on a pre-built blockchain project.
Is it hard to create a crypto exchange?
Crypto exchanges are tough to create due to the technical knowledge needed to start one. All exchanges rely on automatic market makers and blockchain technology to operate.
Using these tools effectively requires good knowledge of coding and smart contract creation.
Who should start a cryptocurrency exchange?
Cryptocurrency exchanges should be the shared project of passionate developers and savvy financial experts.
Those passionate and knowledgeable in these fields can work together to create something that offers the best experience for crypto traders and investors alike.