Cryptocurrency exchanges have opened a new avenue even for the technically challenged to participate in the crypto revolution. This notion has been fueled by the fact that even the most prominent cryptocurrency, the bitcoin, suffers fluctuations of magnificent degrees. The price of the bitcoin skyrocketed from the vicinity of about $3000-$19,800 between September and December 2017. This fluctuation allowed many investors to earn massive amounts of returns on their crypto investments.

In addition to this volatility, the legal status of cryptocurrencies also presents a factor of catalysis for the growth of cryptocurrency exchanges. Some countries like Australia and Malta have permitted payments of bills using bitcoins. On the other side of the spectrum, jurisdictions like India and China have been quite unwelcoming towards this entire crypto revolution. However, it does not mean that investors in these countries cannot participate in crypto exchanges.

Getting to the basics

Now that we know cryptocurrency exchanges present a lucrative avenue of business in the crypto world, it is important to understand the basics of a crypto exchange. As the name implies, a cryptocurrency exchange is a platform where users can trade their cryptocurrency with other cryptocurrencies or even with fiat currency at a market-determined value.

There are different types of cryptocurrency exchanges available in the market. 

Exchanges are governed by administrators, and they are considered to be the easiest and simplest to operate. It has an intuitive user interface which makes it extremely easy for novice traders to navigate. The trading pattern is simple and straightforward. You can buy any crypto-asset for, let’s say, a price of $9500 and sell it at a price of $10,500 with the price increases. The $1000 difference is your profit. Although these exchanges are simple to use, they fall outside the definition of decentralization. The exchange makes a profit from commissions on every trade.

Peer to peer exchanges bypasses the need for an administrator and work completed within the blockchain. The entire ecosystem is completely decentralized and there is no regulatory body. The transaction occurs directly between the users and the platform does the task of connecting the buyers with sellers. In this type of exchange, the profit for the exchange lies in collecting an exchange fee for each transaction. It is similar to collecting the gas fee for all blockchain activities. 

Another exchange time that is a favorite among seasoned traders is the cryptocurrency exchange with margin trading and leverage. These cryptocurrency exchanges help you create contracts and trade positions that would have been considered inaccessible for an investor if they had just their initial capital. There’s a parallel increase in the possibility of profit and loss.

Building a cryptocurrency exchange business

Cryptocurrency exchange businesses have a lot of aspects to be figured out before they are launched. Any cryptocurrency exchange involves putting together a lot of components both technical and non-technical.

The legal front

Cryptocurrency laws in different countries are shaky and uncertain at their best, except for a few countries like Estonia, Switzerland, Singapore, Seychelles, and Australia. The legal requirements for registering a cryptocurrency exchange as a business might vary from country to country. Irrespective of the country and the legal requirements, it is strongly recommended that you complete your KYC/ML formalities for all your customers. This goes a long way in ensuring top-notch security and proper legal compliance.

Recruiting the right people

A cryptocurrency exchange might not demand a lot of people to be employed but it surely does require very specific skill sets to be on board. There also needs to be a proper cascading of powers to ensure a smooth flow of activities. The management team needs to understand the entire cryptocurrency ecosystem and delegate duties to all the employees in a measured fashion. The marketing manager should not only take care of all the marketing and PR activities but should also manage the reputation of the crypto exchange. A support manager will have to ensure that customer support is available across multiple platforms. Above everything, a director of partnerships will have to take care of the task of finding partners and contractors.

It could be observed that one of the core aspects of a cryptocurrency exchange, the technology, is missing in the list of skill sets. Although it could be a good idea to recruit your technical team, the other streams of investments might prevent you from doing so. You can alternatively consider outsourcing your technical work to trusted cryptocurrency exchange development companies.

The architecture

While the expected functionalities of a cryptocurrency exchange remain a constant, they can be executed using various architectures.

A monolithic architecture uses an all in one system which house is all the continents including the wallets, the payments, the accounts, and the administration on the same server. Although it seems convenient to use on paper, it is not recommended, especially for exchanges that handle high volumes of users and transactions.

A modular architecture contains easily manageable modules that separate functions and are hosted on separate servers. It not only results in inefficient functioning of the entire exchange but also separates concerns – addressing an issue with one of the modules will mean that only that module needs to be impacted.

The security

It is quite understandable that most exchanges are centralized to some degree, standing in the polar opposite end of what cryptocurrency and blockchain stand for. Therefore, ensuring top-notch security for your exchange and your users is of paramount importance. There are different kinds of vulnerabilities including hiking of the administrative panel, hiking specific users, hacking servers, and social engineering. Simple steps like two-factor authentication and multi-signature wallets can go a considerable distance in minimizing the instances of compromises.

The matching engine

The matching engine can be considered the heart and soul of your cryptocurrency exchange. The matching engine the trade engine connects the buyers and sellers. The efficiency of your exchange is directly proportional to that of your trade engine.

Liquidity

For any business body that comes under the deck ‘ exchange ‘, liquidity is one of the most important factors. It is a representation of the number of trades happening in your exchange. Proportionally, it can be translated into the number of interests in your order book. The magnitude of liquidity determines the marketability of your exchange. You can consider simulating transactions within your exchange using bots or tie up your exchange with another established exchange using an API to gain advantages from their transactions.

Conclusion

We have already addressed the fact that instead of recruiting a technical team all to yourself, you can consider partnering with a cryptocurrency exchange development company. Alternatively, you can also consider using white label cryptocurrency exchange solutions. These crypto exchanges are available off the shelf and can be customized to fit your requirement. This also saves you a lot in terms of both time and money – both of which are of crucial importance when it comes to launching your own cryptocurrency exchange.