How to start a new сrypto currency exchange

Julia Yurieva is iCoinSoftware co-founder. The startup creates solutions, enabling to connect any block-chain assets, smart contracts, or tokens for buying, exchanging, or trading. With the help of our agency, Yulia wrote this text for her prospective clients.

20 May, 2017 Julia Yurieva, co-founder of iCoinSoftware

Have you ever heard of Bitcoin? It is a crypto currency. You can and have to make money on it. The highest possible income of a few thousand dollars per day, at least, is guaranteed, if you launch a crypto exchange of your own, where users can buy or exchange crypto currencies. It’s not as difficult as it looks.

Where to start?

Most important is to pick the right software. It can cost up to some tens of thousands of dollars, depending on the developer. There are also SaaS solutions existing already, which allow you to launch an exchange in two weeks or so. They’re cheaper, but the site does not belong to you. You don’t fully control it, either. Providers of these solutions deploy exchanges on their servers. Then they require a payment for each particular transaction as well as for any modification. Besides that, it’s more difficult to promote such a type of exchange. In fact, its owner has to compete with other similar exchanges, which are also deployed on the provider’s server. As a result, it may cost even more than the development of a brand new solution.

Building an exchange from scratch is a rather complex process. I know one person who spent more than $500 thousand and a few years of his life on the development of his own software. He went through four development teams. But his platform barely worked. With every new team a lot of time was initially spent, trying to figure out what was done by their predecessors and why. Besides that, nobody was thinking about security. His exchange was hacked and the owner had to compensate users for their losses.

How to provide cybersecurity?

Exchange owners must guarantee safety for their users’ funds. All crypto currency exchanges are being attacked by hackers: Bitcoin is easier to steal than dollars or euros. Real currencies can be tracked and returned. Crypto currency is easier to hide without being recognized.

There is no universal protection recipe against hackers. The first step is to configure security architecture in such a way that it would be difficult for a potential hacker to get hold of assets. The security level should be similar to that of banks. Platform protection is ensured by its code’s quality. If it is written by people who have very little understanding of how money can be stolen, most likely an exchange will be short of its money soon enough.

Having information security experts on board a development team is a must. Attackers are guaranteed to attack. That’s why there should be multi-level security in place. Code should be written so that even if it’s put out onto Github, it should not jeopardize the exchange’s security. We have a few information security experts on our team. They provide different aspects of security, dealing with both external and internal (from our own employees) attacks.

How exchanges are being hacked

The human being is the weakest link in any system. Even if an exchange is well protected from a technically, it can be hacked using the human factor. For example, one of the recent, high-profile crypto currency exchange hacking scandals occurred because all the multi-signature wallet keys happened to be in one person’s hands. Hackers were able to steal a hefty amount of money by compromising the owner’s computer.

Big crypto currency exchanges with significant transaction volumes are constantly being attacked. Why would a hacker attack a small exchange? He would steal two bitcoins or so?

No one is protected from social engineering. I was shocked by Kevin Mitnick’s “Ghost in the Web” book, which came out a few years ago. Kevin is quite a master of social engineering: he forged individuals, and hacked computers using a cell phone, based on his knowledge of human psychology. Fully protected systems do not exist. They are always at risk. At the Defcon Conference, pen-testers were able to retrieve logins and passwords easily, even from companies like Microsoft. This risk should always be taken into consideration.

Ways to make money

First, you have to decide on monetization methods. The easiest way to make money is through trade commissions. On regular exchanges dollars are traded for euros etc. On crypto currency exchanges Bitcoin can be traded for, say, Litecoin, etc. A commission is charged for each transaction.  It can be up to 0.5%.

The second way to make money is to charge coin and token owners for listing. A lot of Chinese crypto currency exchanges didn’t charge any commissions for a long time. They made money by listing tokens and providing trading shoulders (margin trading).

A few words about regulators

In general, attitudes towards crypto currencies around the world are quite different. In some countries they are treated better than in others.  For example, crypto currencies are forbidden in North Korea. However, some Asian countries see crypto currencies as the future of money. In the USA, the attitude towards crypto currencies differs from one state to another. The US Securities and Exchange Commission does not officially recognize tokens, which were issued for an ICO. ICO is a symbiosis of an IPO and crowdfunding.

In order to conduct any activity with crypto currencies in New York, you need to have a Bit- license. If you run an exchange within US territory, you are not allowed to sell crypto currencies to NY residents. You need a license for this particular state in order to do this. Quite often, NY’s residents hide their API addresses, and present themselves as residents of other states. It does have an effect on a crypto exchange. In this particular case, the law is being violated by abusers. There is a pretty long waiting period for a Bit-license. And, like any currency transactions license, it’s pretty costly.

How to promote an exchange

If nobody is using an exchange, you can’t make money on it. First, you have to make an opening announcement, inform users about the terms and conditions you provide and what crypto currencies are going to be traded on your exchange. A good selling point for a new exchange is to have a legal entity. It helps to build users’ trust in a new site.

Bitcointalk forum is currently the most popular. Popular users charge only $ 1-1.5 per post. This makes it a very affordable and inexpensive way to promote a new exchange. It isn’t the only way to promote, of course. A new exchange promotion can be approached creatively.

You may also ask users to test the exchange. The first visitors will most likely have a negative impression. New platforms often contain bugs. It presents a risk, because disappointed users might never come back. But, if you honestly ask people for help, they are more likely to feel involved.

New tokens as a way to promote

Another simple way to promote an exchange is to introduce new or popular coins. In this case it will depend on how much interest there is for these coins. Monero is one example of a new crypto currency which quickly became popular.

If you have a good development team, which can add a new token within hours, it creates an advantage for you, compared to big exchanges. It’s simply not profitable for them. We support about 90% of all existing crypto assets, tokens, and smart contracts. That’s why we react very quickly to the emergence of new ones.

You should follow market changes closely. If somebody went for an ICO and collected $10 million, you must add him to your site faster than others. It’s new exchange’s goal to keep track and monitor all new projects.

You can get acquainted with tokens’ owners, which are just considering ICOs, become friends with them, and make an agreement for your exchange to be the first to present their novelty.

The most important thing is to understand what people want. Some people are looking for interactive graphics. Others want to chat in chat rooms or are interested in new assets. Based on our clients’ experience we can summarize that it is realistic to promote a new crypto currency exchange within about six months.

Trading volumes on their exchanges reach $400 – $600 thousand per day. Owners are making a few thousand dollars per day each. Not bad for a start? All these results were achieved thanks to the fact that they were ready to develop their business and picked unconventional ways to promote it.