How to Launch Your Own Bitcoin Exchange
Starting a Bitcoin exchange is a brilliant idea. However, do you know where to begin? There are a lot of things that you will need to learn before starting your own cryptocurrency exchange. Don’t get blinded by the allure or riches to the point that you forget to exercise due diligence. You must understand how the exchange software architecture works, and more importantly, where to obtain a good one.
What is a Bitcoin Exchange?
A Bitcoin exchange is a website where users can exchange Bitcoin for legacy fiat currency or any other cryptocurrency. Other than exchange services, exchanges also act as a useful resource where you can keep your Bitcoin.
When users choose an exchange for their currency, security is one of the most important things they usually look at. You also need to look at the user-friendliness and the payment options that are available. Consider options that most people prefer such as bank transfer, cash, PayPal, and debit cards.
You also need to ensure that the exchange you are going after is operational in your country. Each country has a different set of rules concerning Bitcoin exchanges. In countries like Japan, for example, all exchanges must be duly registered with the financial regulator in Japan. On the other hand, cryptocurrencies in Argentina are not regulated. However, there are rules in place that govern all transactions that involve Bitcoin under the Civil Code.
Decentralization is another important factor that you have to look into when choosing your preferred exchange.
Coinbase, for example, was in the news recently, having been forced by a US court to give their user data to the IRS. As a result, they informed their users of the civil petition filed by the US government in a federal court, demanding disclosure of their customer records dating back three years. However, the government doesn’t allege any legal contraventions from Coinbase. The concern the government shares is that there’s a possibility that people might be using cryptocurrency as a means of avoiding their tax obligations.
Bitsquare, on the other hand, describes itself as a decentralized exchange. By design, it’s an open-source desktop application from where users can exchange Bitcoin for fiat currency or any other cryptocurrency they prefer. Accordingly, Bitsquare is a P2P platform. Therefore all transactions on the platform cannot be censored or blocked.
Starting a Bitcoin Exchange
There are six basic steps you have to follow before you start your exchange, as outlined below:
- Determine the scope of your operation
- Study and understand the legal confines of your business
- Bring a payment processor and/or a bank on board
- Create good liquidity and transaction history on the exchange
- Secure the exchange
- Customer services
Let’s give each of these points some attention.
Determine the scope of operation
Whether you are planning to operate within a restricted territory, or if you want to take your business global, there are some approvals and licenses that you must obtain for your company before you can establish a Bitcoin exchange. Each jurisdiction has a unique set of laws that you must adhere to. Make sure you consult an expert on compliance and licensing to advise you on the applicable regulations, and how to stay compliant.
Study and understand the regulations
Any entity that plans to run a currency exchange business is required by law to have established KYC practices. This is a process where the business takes the necessary precaution to identify its customers. This is done through any government-issued document like passports, driving license or ID cards.
The idea behind KYC is to try and avoid the prospect of money laundering. Once you have these in place, make sure you follow them to the latter. You must also make sure you integrate them into your exchange. Without this, you might have a customer who engages in fraudulent activities land you in trouble.
Partner with a payment processor and/or bank
Next, you have to get a payment processor or a bank that will handle all your fiat currency payments. It’s wise to choose a bank that offers some online facilities. This makes your business relevant, especially in an under-developed economy or if you are launching in a developing economy. In most of such jurisdictions, the banks barely have services that allow instant transactions online.
In some cases, it can take the banks up to two days to settle a transaction. You, therefore, need to make sure you choose a financial service partner that offers very fast clearance and settles funds faster, much to the convenience of your clients. Users should be able to withdraw or deposit fiat funds into their accounts through manual remittance or through any payment gateway.
Create liquidity on the exchange
For your exchange to operate and become a success, you must have sufficient liquidity. Unless your customers can see some credible trading activity and a full order book, they will be reluctant to deposit funds or place orders. This is a problem that new exchanges usually have.
To improve your liquidity, the following are some tips that can assist you:
Buy and sell between artificial accounts within your exchange. This will help you stimulate trading activity on the exchange.
Create an API that links your exchange with a pre-existing exchange
Consider joining an exchange network. One of the best available is Trust-Deposit. The good thing about it is that they combine the liquidity of all the exchanges on their network. If the network is big enough, you will benefit from good liquidity and order book
Secure customer data
You must make sure your exchange has the best security. This is important so that both your funds and those of your traders are secure. While still on security, you also have to make sure the data about your traders’ personal details such as their bank information and KYC information stays safe too.
Over the years there have been a lot of security concerns, most notably the Mt. Gox hack that was silently run for years, and in the long run, ended up with more than 1% of the total Bitcoins in circulation stolen. Based on reports from Reuters, this hack affected a third of exchanges that were in operation between 2009 and 2015 when this was discovered. Therefore, the lesson here is to make sure that you make security a priority.
Establish good customer support
One of the other areas where you need to pay attention to is customer support. You need to have your staff trained to handle and approve all the KYC requests with due diligence. They also should be ready to respond to complaints from customers, process withdrawals and deposits of fiat currency, etc. A good support system is important and will make sure that your customers can go about your exchange without any worries, earning you revenue from transactions as soon as they sign up.
The Architecture of the Bitcoin Exchange Software
There are 4 important factors that work in tandem to make an exchange software work perfectly.
This is the heart of your exchange. It provides access to your order book, matches purchase and sale orders, generates balances and executes all transactions. An exchange cannot work without a trade engine You, therefore, must make sure that you look into this before you decide for anything else, or you will end up operating a shell.
User Interface (UI)
The interface is the appearance of the exchange from your traders’ side of the architecture. This gives them the website design and trading platform. You must make sure the interface is intuitive and user-friendly. Try not to load up a lot of things on the UI. This might make it bloated and give your customers a bad experience in the long run.
More people are using mobile devices to access the internet at the moment, so it’s only wise that you keep a mobile-friendly UI. An app that’s dedicated to mobile devices would further open up your exchange and ease access for a lot of people, which could also help increase engagement with your exchange, and give you free marketing. People like good things, and will talk about your exchange.
What an ideal UI should do is allow users the chance to:
- Create and access their accounts
- Store, deposit and withdraw fiat and cryptocurrency
- Monitor their order book, balances, transaction history and statistics
- Monitor activity charts
- Place their purchase and sale orders
- Get in touch with your support team
The wallet runs on the exchange server where users store their Bitcoin. As a result, you need to make sure the wallet also gets utmost security. To diversify your risk portfolio, you must make sure you implement a hot/cold wallet system.
A hot wallet is a gateway to your exchange where customers can withdraw coins to their external wallet without seeking approval from an operator. To support instant withdrawals, you must make sure that the hot wallet maintains a positive balance. You can determine and set the balance based on the turnover you are getting from your exchange business.
Cold storage is a wallet where the rest of your Bitcoin balance is kept. Cold storages are held offline. Therefore, even if your hot wallet is hacked, hackers wouldn’t be able to get the rest of your Bitcoins. That’s why you should always have some Bitcoins in cold storage. Cold storage can be as simple as a piece of paper, or a USB stick where you keep private keys.
By creating this split, you are effectively creating a balance between convenience and security for instant withdrawals.
The administrative panel on your exchange is no different from your business management and intelligence software. This is what helps you manage and control the exchange.
The following are some of the functions that you should have on the panel:
- Edit trading fees and spread
- Alter the liquidity admin panel Bitcoin exchange software
- Approve trader accounts to trade upon KYC verification and compliance with all requirements
- Managing currencies
- Debiting and crediting transactions upon user requests
- Responding to support concerns raised by your clients.
Basically, these are the four factors that make your exchange software what it should be. In software engineering terms, this is the architecture upon which your exchange will be running.
Where to Get the Exchange Software?
When determining the appropriate exchange software to use, you have three options to consider, which are as follows:
Hire developers to build the software in-house
If you have access to a team of developers like freelancers and friends who can build and maintain your exchange, get in touch with them. It’s important that they have a good general understanding of how the exchange operates, the ins and outs of cryptocurrency and blockchain technology, and are able to implement the proposals discussed above.
You also need to make sure you choose a programming language that you understand, depending on the currency that you plan to implement on the exchange. You also have to ensure the software you are using is compatible with different payment processing services that you are using, or the banks you are allied to so that you can securely process payments.
Most people tend to ignore this, but you should be realistic when setting your goals and targets for developing, maintenance and upgrades to your in-house software. Building an exchange is not a simple affair. You, therefore, need to understand that this might take you even two years depending on the experience of your developers. You also have to factor in support for multiple languages, currencies and the ability to support use on mobile platforms. This should cost you close to 400,000 euros.
Use free/open source scripts
Visit GitHub, or any other forum you are aware of. You might come across open-source Bitcoin exchange scripts. The good thing about this is that the code is free. However, cheap might be expensive in the long run.
There are some risks that are associated with free scripts, as discussed below:
- You need an expert to implement the code. This must be someone who understands the language and knows how to handle any challenges that might arise. This might also take a while, and full customization might also cost you some money and time.
- There’s no guarantee that you will get a reliable and secure script online. You might encounter a buggy program, which is vulnerable to attacks, or one that has malicious code hidden within that can withdraw coins from your exchange in stealth mode.
- The level of development support that you will get from an open-source script is rather limited. More often, developers are unable to fix the bugs when they are left to handle it on their own. They might also struggle to enhance the performance of the exchange. If the project whose script you picked up was abandoned, you would be left without support.
White label exchange software
This is exchange software that has been tried, tested and proven to be efficient. This is also a program that gives you the freedom to customize it as you see fit, to meet your preferences. You can customize the charts, currency, language, brand placement and design.
One of the perks of using such programs is that you don’t have to worry about the technical aspects of the program, like maintenance and implementation. All the important components of this exchange have already been built and tested. Therefore, all you need is to customize it to suit your immediate needs.
This is a viable option because you don’t get to spend a lot of time on customization, and you also save a lot because getting a white label license is generally cheaper compared to going all out and developing the exchange on your own. While developing an exchange application might cost you around 400,000 Euros, getting this license should start at around 7,500 Euros.