Cryptocurrency exchanges have heralded to the world that making a profit in the crypto space doesn’t mean you will have to invest heavily on high-performance computers and high amounts of electric power. It has shown the world that a classically inclined investor with a strong penchant for understanding the market and unravelling the patterns in fluctuations can still make a profit. Let us look at cryptocurrency exchanges in detail, including but not limited to the architecture, the business aspects of it, the avenues of making a profit, the different types of crypto exchanges, and above everything, the science of building a profitable business by using a bitcoin exchange software platform.
We will also primarily focus on the white label bitcoin exchange platform, the advantages presented by white label bitcoin exchange software, and the art of choosing the right bitcoins exchange development company.
What is a bitcoin exchange?
A bitcoin exchange, as the name implies, is a platform where users or investors can trade bitcoins for any other crypto or fiat currency. The ‘trades’ are executed at predefined exchange rates dictated by market-dynamics such as demand, supply, acceptance, and a host of other factors.
The bitcoin exchange is, in essence, the piece of technology that makes the process of trade possible. Largely, it could also refer to the entire business ecosystem that houses the components that enable the trade.
The entrepreneur who facilitates the cryptocurrency exchange platform and the revenue from commissions charged on the profit and on the transaction charge is living on every transaction. A bitcoin exchange software is, in many ways, similar to a forex trading platform. The biggest difference is thatforex trade concerns fiat currency, and the bitcoin exchange has to essentially accommodate cryptocurrencies. Just like how photocopiers are referred to as ‘Xerox machines’ in certain countries, cryptocurrency exchanges are referred to as bitcoin exchanges. The denaturing of the nomenclature can be attributed to the popularity of bitcoin, and the fact that bitcoin is a lot bigger than is umbrella-term.
The entrepreneur who facilitates the cryptocurrency exchange platform and the revenue from commissions charged on the profit and on the transaction charges levied on every transaction. These transaction charges apply irrespective of the trader, making either a profit or loss. Therefore, the exchange is bound to make a profit, making it one of the most lucrative crypto business models.
Building a bitcoin exchange
Bitcoin exchanges can be extremely profitable as a business. However, they are also notoriously difficult to build from scratch. When we are talking about building from scratch, we are not talking about the technology involved but the business aspect of it. There are a lot of factors that go into building a proper bitcoin exchange.
The first and foremost thing that needs to be taken into consideration is the country of incorporation. The laws that govern the functioning of any crypto business are shaky and uncertain.
There have been instances where some countries have completely shunned anything to do with cryptocurrency and blockchain-like China. There are countries that have been extremely warm and welcoming – like Estonia, Malta, and Japan.
Some countries have properly regulated crypto businesses and have strict laws and regulations governing them. The United States, Canada, the United Kingdom, and Australia fall into this category.
Some countries might not accept cryptocurrency as a mode of payment but do not impose any restrictions on businesses that use the technology. Countries like India would fall into this category – there are no restrictions and opening a blockchain development company or a cryptocurrency exchange for that matter. However, there are heavy restrictions on using bitcoins or any cryptocurrency as the method of payment.
Figuring out the legal aspect
As discussed in the beginning, the laws that govern cryptocurrencies and crypto businesses are shaky. However, it does not mean that the future looks bleak. With the growing acceptance of the awesomeness of blockchain technology, and with new cryptocurrencies springing up left, right, and centre, it is only a matter of time before a lot of jurisdictions start to embrace this new technology. It’s quite possible that the legal regulations might become favourable and accommodating. In all of this, a legal team has to be in your command to find out how these laws have been changing, and how your business needs to establish compliance.
It is to be noted that the regulations that apply for local businesses might be drastically different if you were to start a cryptocurrency exchange that operates across multiple geographies. Therefore, meticulous care has to be taken on the legal front to ensure ongoing compliance. Any lapses in the legal friend might not only be detrimental to your business but also to the reputation of your brand.
Partnering with a payment processor
The nascent stage in which cryptocurrency and the blockchain technology are in has meant that not many banks would be ready to accept cryptocurrency as a mode of payment. However, there are quite a lot of technologically ambitious financial institutions that have started accepting crypto payments.
More often than not, the payment partner question poses a heavy challenge to any crypto exchange business enthusiast. If they were to partner with a payment processor who does not accept cryptocurrency, it is quite possible that they might have to tie up with another financial services provider who will convert fiat currency into crypto. This complicates the process and also results in a proportional increase in the cost of transactions.
Finding the right payment partner and tying up with a perfect bank to handle your business transactions goes a long way in ensuring the smooth functioning and the marketability of your bitcoin exchange.
Finding the right technology partner
Since we have a complete section dedicated to this part, we will discuss this a bit later in this article.
In the classical realm of investments, liquidity is defined as the magnitude of the ease with which you can convert an asset into cash. In the context of cryptocurrency exchanges, it refers to the volume of transactions that happen within your exchange. Indirectly, it is also a measure of the number of users who participate in trading on your exchange.
It is quite understandable from the perspective of investors that they can’t execute an exchange only when there is a healthy count of buyers and sellers. However, it might be close to impossible to showcase liquidity in relatively new crypto exchanges.
As a workaround, you can consider simulating transactions within your exchange by using bots. These artificial accounts help in building some liquidity within your exchange. Alternatively, you can also consider linking your exchange with another pre-existing exchange through an API. This will ensure that the benefits of liquidity in the older exchange will trickle down to yours.
One of the latest strategies that new cryptocurrency exchanges are adopting is to become a member of a group or a consortium of exchanges. The liquidity benefits of the exchanges in the group are shared among them, so one exchange benefits from the other!
One of the most distinguishing features of blockchain technology is its decentralization. For a cryptocurrency exchange, however, there is a certain degree of compromise on this attribute. This makes the Bitcoin exchange automatically susceptible to cyber-attacks.
There might be quite a lot of points of vulnerability in a crypto exchange. This does not, however, mean that you cannot secure your exchange.
It goes without saying that simple security practices like two-factor authentication and multi-signature wallets should be made a part of your exchange. In addition, it should strongly be encouraged that the funds should be kept stowed away in your cold wallets. As you may have known, cold wallets are extremely secure compared to hot wallets.
In addition, you will also need to educate your users and investors on the possibilities of compromises using social engineering. They should be encouraged never to enter their login credentials in any other site or click on malicious links from unsolicited emails impersonating your exchange.
Marketing and customer support
All the efforts taken in building your cryptocurrency exchange might fall flat if you do not invest a lot of time, effort, and money on marketing. Marketing plays a very important role in ensuring the success of your exchange. Marketing your exchange is a grand culmination of a lot of aspects put together.
On one side, you will need to go for dedicated cryptocurrency-related forums where you will need to communicate and build a rapport with your prospective investors. There are also a lot of crypto-specific marketing methods, like running bounty programs. It is important to mark your presence in arenas of high engagement in the blockchain community, Like BitcoinTalk and CoinTelegraph.
In all of this, it should not be forgotten that the old-school digital marketing methods still hold relevant in marketing your cryptocurrency exchange. Search engine optimization, paid search ads, social media advertising, Facebook and LinkedIn pages, and even email marketing still present lucrative avenues for building a big brand image and a repository of leads for your cryptocurrency exchange.
Once you have launched your cryptocurrency exchange, your customer support also placed a passive role in marketing your exchange. It is to be noted that in the initial days of your exchange being launched, there is a lot of possibility for high traffic of queries, and proportional security threats. As much as your customer support team, your security team should also be on high alert. You should make customer support available across multiple platforms like phone, email, and chat. It would also be a great idea to gather feedback from social media platforms by creating unique hashtags that will make it easy for you to curate user-generated content.
Let us now get back to the technological aspect of the cryptocurrency exchange. Building a cryptocurrency exchange involves hiring high-skilled resources, putting in hours of human effort, typing out thousands of lines of code if not millions, and above everything, meticulously testing the platform for any possible glitches and shortcomings.
You can either choose to build your cryptocurrency exchange from scratch or use an open-source code. If you were to choose to build your exchange from scratch, it is to be remembered that it will cost you quite a lot of time and money. Building a cryptocurrency exchange is capital-intensive. It is highly recommended that you have enough capital to fund your cryptocurrency exchange. This part is extremely important as there have been many instances of exchanges fizzling out midway because they did not have enough cash support.
Using an open-source code might not cost you money, but it has its own set of flaws. On one side, the code might not be completely reliable. It is quite possible that there might be a few back doors that could render your cryptocurrency exchange vulnerable. It also takes quite a lot of effort to understand the code, customize it according to your requirements, and make your exchange presentable and marketable.
One of the most lucrative and business–sensible options that many crypto entrepreneurs have been choosing off late is to customize a white label bitcoin exchange. These white label bitcoin exchanges bring the benefits of both an open-source exchange and an exchange built from scratch. The insured top-notch security and might not have loopholes. At the same time, they also do not cost a lot of time and money, enabling launching your exchange in the quickest possible time.
The components of a crypto exchange
The first thing that meets the eye of the user when they access your cryptocurrency exchange is the user interface. It should not be forgotten that people who access your cryptocurrency exchange are not technically sound blockchain experts but common investors who understand the language of money more than technology. Therefore, your user interface has to be extremely easy to use and intuitive to navigate. Even simple aspects like the layout of buttons, the font used, and the mobile responsiveness contribute greatly to the appeal and usability of your bitcoin exchange.
The users keep their money, both fiat, and crypto, in their cryptocurrency wallets. A wallet is a daemon that stores your crypto coins. There are two types of wallets – the hot and the cold wallets. The hot wallet is the connected wallet, and it is used to interact with your exchange and your payment system. The cold wallet, on the other hand, is used just for storage. The cold wallet is usually a sheet of paper or a USB device.
The trade engine can be considered the heart and soul of your cryptocurrency exchange. This is where the matching between the buyers and the sellers happen. The other book takes note of all the buying and selling orders, and the trade engine takes care to match the right buyers with the right sellers, so the cryptocurrency trading can be executed. The goodness of an exchange is proportional to the performance and the robustness of the trade engine.
Overseeing all these functions is the administrator. The administrator is responsible for upkeep it off the sanctity of the exchange. They also have the power to enable or disable traders. They also can’t change the content on the interface of the cryptocurrency exchange. If need be, they can fix standard exchange rates, commissions, and a host of other factors that are considered vital for the functioning of the cryptocurrency exchange.
There’s no question that cryptocurrency exchanges are well–poised to be the business model of the future. It is a proof of the concept that one need not be technically aware to participate in the cryptocurrency world and make a profit out of it. If you are one of those cryptocurrency entrepreneurs who would like to create a business out of an exchange, all you need to do is invest in a white label bitcoin exchange. There are companies that specialize in customizing white label cryptocurrency exchanges. They will take care to not only develop your exchange but also make the exchange bear your brand image, so you can start to make a profit in the shortest possible time.