A Comprehensive Guide To Cryptocurrency Exchange Development
Have you ever noticed how some scientific and technology cool advancements are intended for a certain purpose, but they find utility in a completely different arena? Cryptocurrency exchanges fall perfectly into this category. While cryptocurrency was created as an alternate means of payment, cryptocurrency exchanges became mainstream applications for this technological and financial innovation.
The main reason for the shifting of these skills can be attributed to the extremely volatile nature of cryptocurrency. Even the most renowned cryptocurrency, Bitcoin, was not spared from this impact. It was priced at about $19,400 in December 2017, and it plummeted down to $3000 in the same month next year.
With this magnitude of fluctuation, it might not be possible to trade with cryptocurrency. However, the relative fluctuation between these currencies opens up an entirely new avenue of the business called cryptocurrency exchange.
Table of Contents:
- What is a Cryptocurrency Exchange?
- Types of cryptocurrency exchanges
- How do cryptocurrency exchanges work?
- Features of Cryptocurrency exchanges
- Benefits of cryptocurrency exchanges
- What to look out for before joining crypto exchanges?
- Why do we even need Cryptocurrency Exchanges?
Cryptocurrency exchanges are websites, or in rare cases, mobile applications where you can buy, sell, exchange, and trade cryptocurrencies for other digital currencies or fiat currencies like dollars and euros.
To participate in a reputed cryptocurrency exchange, you will need to open an account that verifies your ID before you can trade. There are also certain crypto exchange platforms that you can use without having a need to create an account, leave alone verifying it.
Although the core function remains the same, there are different garnishes to a cryptocurrency exchange, making it quite diverse in its presentation.
There are trading platforms that connect buyers and sellers, and they take a transaction fee for each transaction that they facilitate.
There are direct trading platforms that offer direct person-to-person trading. This is similar to craigslist where the buyers and sellers can exchange currency by initiating a standard bank transfer. There is no fix to the market price when it comes to direct trading exchanges, and sellers can set their own exchange rates.
There are brokers where anyone can visit a website and can buy cryptocurrencies at a price set by the broker.
The crux of how all cryptocurrency exchanges work can be summed up in a few sentences. The sellers have certain crypto assets that need to be sold. On the other hand, there are buyers who are in need of acquiring crypto assets. Both these requirements to buy and sell can be listed on an order book.
Under the order book, there is a trading engine that matches the buying orders with the selling orders. Once there is a match, the trade is executed by the cryptocurrency exchange software.
In a centralized crypto exchange, the exchange itself takes care of completing the transaction. In a decentralized exchange, however, the method is a little bit different as the entire transaction is not handled by a centralized third-party but by a smart contract. The smart contracts create an escrow where both the buyer and the seller can deposit that money and asset. Once the details of the transaction are verified, the money is passed to the seller and the asset is passed to the buyer.
A cryptocurrency exchange, as much as it is a stunning business idea, is also a marvelous piece of technology. It needs to be packed with certain features to make it market-worthy. Let us look at a few features that can be considered extremely essential for any good cryptocurrency exchange.
Your cryptocurrency exchange should support margin trading. Margin trading or leverage trading simply means that the trader can borrow funds from the cryptocurrency exchange, so they can have access to training positions that are beyond their reach. The margin is generally represented as a multiplier ratio. There are crypto exchanges that offer a 2x, or 10x, or 100x leverage. This means that if a traitor has a balance of just one dollar, they can trade on positions worth two dollars, or $10 or $100, in that order. This helps traders multiply their profit but at the same time, it should be remembered that it also increases the risk of losing money.
Your cryptocurrency exchange should let traders trade on derivatives. These derivatives can be of any type that works in the financial world. They could swap that to represent an arrangement between two parties to exchange cash flows in the future. It can also be a futures contract with the buyer who has committed to purchase an asset at a fixed price at a certain point in time, and the same can be applied for the seller when they have agreed to sell crypto at a certain price. It can also represent options that are quite similar to futures trading but without the element of obligation.
There would be certain experts involved in trading with your crypto exchange, and their expertise is showcased in terms of the profit that they make in the trades. There should be a facility for novice users to replicate the trading patterns of these experts, and this process should be automated and should reside innately within the system. This strategy is called copy trading, and it can come in as a big marketing point for your cryptocurrency exchange because it will attract novice users to use your crypto exchange. It also presents a lucrative avenue of profit for experienced traders.
A cryptocurrency exchange presents both the business owner and the wide base of traders with a bouquet of advantages.
One of the most obvious advantages of a cryptocurrency exchange falls in line with an innate property of the blockchain. The transactions on exchanges are almost immediately affected, and the coins are immediately transferable.
Unlike the traditional stock exchanges, crypto exchanges do not have any time limit on them. They are in operation 24/7. Since the crisis of crypto coins are quite likely to be volatile, it might not make sense to have specific trading windows as it might result in a considerable magnitude of loss or profit!
Cryptocurrencies are immune to inflation. For all you do, a certain quantity of bitcoins can buy more in the future than what it again by today. This will ensure that it remains a worthwhile investment even in the long term.
The transactions carried out on a crypto exchange are anonymous and irreversible. Although certain exchanges mandate KYC/AML formalities, they are just to safeguard the exchange from being used by malicious users and not to breach the privacy of the traders.
In addition, some cryptocurrency exchanges facilitate affiliate programs where users can earn commissions based on new users to introduce or either in terms of the volume of trade that they facilitate. This, in addition to the exchange of currency, gives another opportunity for users to earn from the exchange.
Not all exchanges are created equal! Meticulous care and research are mandatory before you invest your hard-earned money in a cryptocurrency exchange. There are a few attributes that you can look for to ensure that the exchange is the right one.
Extensively read the reviews from both individuals and reputable websites to know the history and the reputation of the exchange. You can even ask questions about the exchange on dedicated crypto exchange forms.
Exchanges should explicitly talk about their trading fees on their website. It is important to completely understand the deposit, transaction, and the withdrawal fees associated with the exchange before you invest. Missing an understanding of those might result in you losing out quite some money.
Your exchange should be able to accept multiple payment methods. It should also be dynamic in terms of the trading options it allows. At the same time, it is important to draw the line between being expensive and being secure. Some exchanges might charge you extra for completing the KYC/AML formalities, especially when dealing with credit card payments. This might result in higher processing fees, but at the same time, it also ensures that your funds are quite likely to be safe. In fact, the insistence on verification should be something that you should look for in your exchange to ensure that it protects you from scams and money laundering.
Features offered by some exchanges can be accessed only from limited countries. Although it might not be possible to get an exchange that can operate in any country, the best thing to do is to ensure that you have a complete list of possibilities.
Cryptocurrency, in its heart and soul, is nothing but a type of trading instrument. It was set in the first place to provide an alternative to the traditional currency that we use. Its technological manifestation meant that it could be used for trading worldwide, round the clock, and transactions could be completed with immediate effect.
However, cryptocurrency failed to materialize on the train in front. However, it is still treated as an asset, irrespective of its acceptance. It cannot be denied that someone who invested about 1000 bitcoins in 2010 is quite likely to be a millionaire today.
Therefore, as an asset class of its own, a cryptocurrency needs to be traded, so the benefits of the investment can be reaped. It also ensures that cryptocurrency stays relevant, not only in the world of technology but also in the world of finance and investments.
Cryptocurrency exchanges have positioned themselves as a dependable avenue for making a profit, especially for aspiring crypto entrepreneurs who would like to create their own cryptocurrency exchange.
If you are one of them, instead of investing in building a crypto exchange from scratch, you could consider going for white label Cryptocurrency Exchange Development solutions. These white label crypto exchange software platforms are extremely easy to customize, and can be launched in a matter of weeks, if not days!