How to Set Up a Crypto Exchange

No doubt, crypto exchanges are a massive part of the cryptocurrency industry. They have become a one-stop-shop for buyers and sellers to trade various digital assets.

For a businessperson, this begs the question: Can you start your own exchange?

A few years ago, the answer to this question would have been a ‘no’ but with the technology available today, it is now possible.

There are different ways you can set up your exchange.

You could hire professionals to do it or assemble a team and build from scratch, or better yet, use an exchange kit.

With the abundance of several open-source solutions and software, you can assemble your own exchange the way you want it. This guide will explain the hows and whys of setting up an exchange.

Should You Start an Exchange?

If you already have a token or an established user base or both, you should most definitely consider starting your own exchange to avoid paying coin listing fees on larger exchanges. Running a crypto exchange can offer you massive rewards and open your business to new opportunities like lending and crowdfunding. With the global demand for digital assets rising, starting an exchange can offer excellent business potentials. This might be the time to get on board and capitalize on this multi-billion dollar ecosystem.

As proof of how lucrative the industry is, twelve billionaires on Forbes offer cryptocurrency services and work directly within the sector. Sam Bankman-Fried of FTX Exchange is worth an estimated $8.7B, making him the wealthiest crypto entrepreneur. Brian Armstrong of Coinbase is reportedly worth $6.5B. The chances of another crypto billionaire making it to Forbes next year are high. Of course, no guarantee starting your exchange will turn out to be successful, but there's a massive opportunity to maximize your income. 

What are the Different Types of Crypto Exchanges?

Currently, exchanges are divided into three - Centralized Exchanges, Decentralized Exchanges, and Peer-to-Peer Exchanges. Each exchange has its advantages and disadvantages, so I'll be discussing them below.

Centralized exchanges (CEX) are the most popular types. Indeed, a study published by Cryptopedia has shown that, as of September 2020, 95% of digital asset trades are executed through centralized exchanges. These platforms act as the custodian to store digital assets, functioning as intermediaries between sellers and buyers. This type of exchange charges a fee, ranging between 0.1% - 3.99% per transaction, to cover the costs of running a secure platform. Examples of centralized exchanges include; Kraken, Binance, Huobi, and Coinbase.

Decentralized exchanges, also known as DEX, are the opposite of CEXs. They are non-custodial, implying that they do not store customers' cryptos. DEXs are the real definition of decentralization because the infrastructure facilitates the transaction between buyers and sellers directly. It means that digital assets are sent directly from each user’s wallet.

DEXs are more secure than CEXs because they do not store cryptocurrencies, thus less prone to hacks. However, they have limited features, are not user-friendly, which can cause users to make irreversible mistakes. DEX can also suffer from poor liquidity. Uniswap and PanCake Swap are examples of DEXs.

Peer-to-Peer or P2P exchanges are similar to DEXs, in that they facilitate a direct transaction between the sellers and the buyers. The only difference here is that instead of using wallets, the exchange connects the traders using an escrow service to ensure that the transaction is completed. P2P exchanges are popular in Africa and countries where there's a government ban on BTC exchanges. Paxful, Bisq, and LocalBitcoins are examples of P2P platforms.

How to Start an Exchange

According to bitHolla, most cryptopreneurs prefer to launch their exchange in a centralized model because of the huge revenue they can realize and the control over the brand. Owners can generate revenue from trading, deposits, coin listing, and even invent new models. Here is how you can set up an exchange:

• Collaborate with a white-label exchange
• Select a crypto exchange business name
• Add countries and language support
• Choose the coins to list and trading pairs
• Host the exchange on a registered domain
• Market and promote the exchange
• Urge customers to create an account

What is a White-Label Crypto Exchange?

A white-label crypto exchange is a software that connects to various blockchains and provides a fully customizable solution for hosting coins and markets. Some white-labels come in free to use kits, which can be configured to offer features, such as trading pairs, tiered trading fees, etc. Examples of companies that offer white-label crypto exchanges include HollaEx, Skalex, etc. 

Why Start a Crypto Exchange Business?

As mentioned previously, it makes good business sense to consider starting an exchange if you have the following:

• Have a coin or plan to start a new coin.
• Already have an established user base.
• In finance services but require an upgrade by connecting your services to various blockchains.
• Looking to expand into a new and growing industry.
• Require a hard-to-trade asset to be digitized so it can be more easily traded and shared.

How to Start a Crypto Exchange Business?

Starting from scratch can be difficult, especially if you have no expertise, resources, and time. You may even need a partner with some background in tech and crypto to help vet any white-label options.

Here are a few guidelines to help you get started:

1. Conduct market research and understand which exchange will suit your customers better. Get a tech member of your team to help vet the system.
2. Select the countries to support.
3. Conform to the rules and regulations of the jurisdiction.
4. Partner with crypto experts and/or use an open crypto exchange kit
5. Determine if you want to accept fiat currencies.
6. Establish the coins you want on the platforms and make them in widely-used formats such as ERC-20 and/or BEP-20.
7. Offer the best support by using tools like ZenDesk, Freshdesk, etc.

Do Your Due Diligence

Running your crypto exchange is profitable only if you do it right. If you decide to set up your exchange, these guidelines above will help you do that. Make sure you research your competitors to develop a reputable platform.

Be sure to check how your exchange handles blockchain fees and make sure to test the software fully before committing which open-source exchange kit allows you to do so. If it is a closed source white-label solution, arranging a trial and discussing it with the provider would be wise.

These days, exchanges do more than just trade coins or tokens. They have integrated NFT marketplaces into the platform where digital art can be bought and sold. In addition, DEXs also have liquidity pools to facilitate spontaneous trading without order books and is always a good added benefit for would-be coin creators but ultimately, there is so much more to gain from having your own centralized exchange system, which can now easily be done with easy to set up crypto exchange tool kits now freely available.