Despite significant coin volatility, crypto markets continue to grow as more institutions incorporate crypto into their strategies. Following the rapid expansion of cryptocurrency exchanges, a number of entrepreneurs are considering diversifying their businesses by developing their own fintech.
In this article, we’ll answer the following questions:
- How do you launch your own crypto exchange?
- Where can I find the best liquidity?
- What are the major risks?
- How much does it cost?
CoinMarketCap currently lists 534 crypto exchanges, with the number growing by the month. Daily trade volumes for the top 5 of them exceed $20 billion.
Looking at these figures may make starting your own cryptocurrency exchange seem easy. However, it is a difficult process with dangers and pitfalls around every corner.
Steps To Launching A Crypto Exchange
Starting a crypto exchange typically involves at least five steps as follows:
- Choosing the type of venue. It can be either a centralized exchange (CEX) or a decentralized exchange (DEX)
- Choosing regulation
- Finding a liquidity provider
- Choosing the right software
- Infrastructure support and system sustainability
- Investing in marketing and promotion
Choosing The Type Of Venue
An investor may consider two types of exchanges as a possible solution: a centralized exchange (CEX) and a decentralized exchange (DEX).
- Centralized Exchange (CEX): A centralized exchange is a platform where customers can deposit funds and trade cryptocurrency and fiat currency pairs. They need personal information to carry out KYC procedures and protect trades.
The platform is in charge of keeping the client’s money secure. They are, however, vulnerable to hacker attacks. - Decentralized Exchange (DEX): Decentralized exchanges conduct peer-to-peer transactions such as trades and loans. They are a viable option for users who do not wish to provide personal information.
However, all operations are directly linked to the clients’ private wallets. DEXs have much lower liquidity and typically do not offer popular coins. This model is vulnerable to market manipulation.
Regulation
Financial institutions are increasingly investing in cryptocurrency markets. CME Group, SIX, Euronext, Eurex, and other major exchanges have integrated digital assets into their product lines.
Growing trade volumes force governments to tighten their grip on the industry. Traditional financial regulation is already in place in over 100 countries.
For those considering starting an exchange, regulation is critical. Malta, Gibraltar, Switzerland, Cyprus, and Singapore, for example, are recognized as attractive countries.
However, we strongly advise you to work with a legal partner or to consider one-stop-shop solutions that include legal support.
Quality of Liquidity
An exchange generally resembles a store. To be able to trade, you must have goods, prices, and customers. The goods are represented by liquidity at exchanges.
In finance, liquidity refers to the ease with which you can sell an asset, interest, or security without affecting its price.
One of the most important factors used to compare exchanges is the quality of their liquidity. Basically, any effective exchange needs excellent liquidity quality.
What is liquidity quality?
The quantity and speed at which an investor can trade in popular assets determine the liquidity quality; this is referred to as the depth of the order book, which is a list of pending orders.
On crypto markets, the most popular asset pairs include BTC/ETH, BTC/USD, BTC/EUR, ETH/USD, ETH/EUR, etc. This means that the vast majority of investors want to trade these instruments. Having a large order book on these pairs is therefore critical for any exchange.
Different liquidity providers can be used to obtain liquidity. The most popular are other crypto exchanges and OTC desks or from crypto-native marketplaces like Finery Markets where Liquidity Providers (mostly OTC desks) stream their firm liquidity.
The concept of a multi-dealer execution venue encourages OTC desks to offer the best prices to institutional clients (brokers, banks, hedge funds, payment service providers, etc).
Infrastructure
A group of technologies makes up a cryptocurrency exchange. Its architecture includes a matching engine, wallets, a trading platform, a client area, and an admin panel. You’ll need a competent team of IT professionals to support it.
Investors that are thinking about starting their own cryptocurrency exchange typically do not have an IT team. Their focus is on increasing their share of exchange commissions rather than dealing with the time- and money-consuming HR and product development issues.
SaaS products and cloud-based software infrastructure solutions meet their investors’ immediate needs while reducing the time it takes to set up a cryptocurrency exchange by up to two weeks.
A reliable liquidity solution and solid relationships with providers help in earning markups on supplied liquidity.
Service providers such as Merkeleon provide one-stop-shop solutions as well as comprehensive IT support. They also have an SLA (Service-Level Agreement) that governs response time to all trading issues. Technical support includes things like cloud hosting, bug patches, scaling-up and integration operations, and customization.
Choosing a cloud-based solution essentially provides a client with an immediate opportunity to begin earning on trades.
The Costs Of Launching A Crypto Exchange
A simple cloud-based exchange can be launched in two weeks for about EUR 300k. This cost includes an infrastructure solution as well as a minimal liquidity budget.
Of course, at first, it cannot compete with any international exchange. However, prudent investments in relationships with liquidity providers, marketing, and business development will allow it to quickly scale to popular markets.
Due to their non-custodial business models, crypto-native marketplaces like Finery Markets make it possible to establish relationships with numerous liquidity providers at a minimal cost.
When using traditional crypto exchanges, you must invest 100% of your budget to maintain the liquidity balance on your trading pairs. However, newly established exchanges that work with Finery Markets only require 20% of their budget on deposits to ensure settlement.
The remaining funds could be used for marketing and business development purposes.