Crypto Brokering | Technology Setup

First things first. Before getting into technological details, we need to highlight important insights:

• The number of crypto traders doubles every year. Today it is around 300m traders, last year it was 120m traders, and by the end of this year, it could reach a billion traders according to Crypto.com. But do not let these numbers mislead you.
• Talking to Forex brokers and to exchange software providers, we found that 90% of new crypto exchanges fail to be profitable in their first 18 months.?
• People who launch a crypto exchange business are often high net-worth individuals who made money on crypto. Or they are Forex brokers who want to run a Spot crypto exchange, and not crypto CFDs.

First: We can summarize the main reasons for this massive failure in two points

First one, is that the management of these exchanges are not deeply familiar with the crypto market dynamics and its technological infrastructure to allow them to offer attractive propositions to their crypto traders.

The other reason why most exchanges are not profitable is that the traffic per user is lower compared to the forex market, because of the psychological difference to the typical Forex trader who is active with a high-risk tolerance. Hence, if your customers do not generate traffic and you do not know how to stimulate it, your exchange is doomed from the start.

So, it is mainly a know-how issue. But even the know-how alone is useless if you cannot reflect it in your products via the technology you are building. Which leads us to speak about the next part of this article.

Second: Crypto Exchange Technology / Infrastructure

Now, when it comes to the technological infrastructure, or the components of a functional crypto exchange, we first have to look at connectivity to service providers.?

Connectivity

1. Connectivity part includes wallets' service providers, because you will want your traders to have their own unique addresses, so they can share it with their friends to send and receive funds. Please do your own research on the best crypto wallets service providers and be aware of some crypto wallets providers who claim to be connected to all blockchain protocols and once you subscribe with them you realize that they are only connected to a few.
2. Connectivity also includes KYC service providers. One thing to factor in is what percentage of people pass the KYC, and if there’s public information about this. Because the last thing you want is to spend money on acquiring customers and lose them at the KYC stage. So, consider allowing people to trade and deposit a certain amount via light verification, and later you ask for a full KYC for larger amounts. This way you reduce the customer churn rate. Also, consider manually going through the KYC process to avoid being unpleasantly surprised by how complicated the process is and the potential outright rejection. Examples of popular KYC providers are Shufti Pro which offers automated & globally compliant KYC settings, Jumio, and Veriff.
3. Connectivity also includes SMS dispatchers. It’s used for several reasons; the most used case is for issuing a one-time password (OTP) in order to verify a new customer’s ID and securely onboard them. A good example of an SMS dispatcher that has wide client base in the crypto market is Twilio. Their messaging API provides global coverage at reasonable rates.
4. The last and most important part in Connectivity is connecting with Crypto Exchanges for liquidity. Before you decide on which exchange you connect with, you have to check deposits and withdrawal rates, and also check the trading fee ladder, so you can adjust that to your projected volumes, because some exchanges are more attractive when you have lower volume, and some are more attractive if you have higher volume.

Applications

1. You will need to build a mobile app for users to trade and invest on the go.
2. You will also need to have a web app, where users can access your exchange from a desktop using a web browser.
3. And finally, you will need a backend platform /admin panel for you to manage all the business.?

Order Processing

Third part in technological infrastructure is Order Processing, this includes Order Matching, and Routing to Exchanges.

1. As for the order matching, a lot of exchange software allow you to match your orders internally which makes you compliant with the exchange license that you will acquire. Question is? do you have enough traffic to match orders internally? Otherwise, connecting to an external liquidity is the solution. which is the next point.
2. Routing to exchanges. Here you can plug with one exchange. Or multiple exchanges. If multiple exchanges, you can connect with centralized exchanges or/and decentralized protocols. The advantage of connecting with decentralized protocols is that you can get more instruments, and you will be the quickest to market as soon as a hot coin is available, because you will always find it on a decentralized protocol like Pancake swap for example. On the other hand, decentralized protocols have some disadvantages like the higher cost, and often considerably higher processing time.

Funds Security

The fourth and last part will be covered under the technological infrastructure is the Funds Security. Where are you going to hold your funds?

1. Is it going be your Own wallets/Self Custody (hot or cold),
2. Or you will be holding the funds at an exchange account like Binance and Coinbase?
3. Or you will go with the most secure but most expensive option where you hold your funds with a Custody provider like Copper? Please note that in this case costs are high because you will be charged for both, holdings, and transactions. Also, if you go with the custody provider option, keep in mind what instruments and what transfer protocols do they support (because in certain cases inflow and outflow transaction costs can be one hundred times more expensive or cheaper).

Third: Crypto Exchange Prices and Different Technology Options

When you decide to go ahead with building your crypto exchange technology, you will have Different Options.

1. First, you can go with the cheapest option and buy a Ready White label solution. This will cost you between $10k - $50k. it takes between 1- 4 weeks to be ready to go online. And comes with some challenges, as it only provides basic trading options and features - Any additional requirements and features will cost additional time and money. One critical point to highlight, is that once you go with this option, see if you can use your own liquidity accounts or you are locked to use provider’s liquidity accounts. There are some companies provide white label solutions, like AlphaPoint, RadinDev, DevExpert, B2Broker, and Mercurian Crypto Technologies (which is us).
2. Your second option is to build the technology In-house. This will cost you between $500k - $1m. And it takes between 12- 24 months to be ready to go online. This also comes with its own challenges, apart from the excessive cost, finding talents who are specialized in financial trading is difficult. it also has very high delivery risks, based on experience from many of our clients.
3. The third and last option, is to get a Bespoke or tailored Crypto Exchange. With this option you will get a fully customized platform with propositions that matche your customer needs with a relatively short time to market. This will cost you between $80k - $500k and it takes between 2-12 weeks to be ready to go online. Its only challenge is that it will cost you a bit more than a ready white label exchange. Because brokers sometimes want this option, but they see it a bit expensive, we at @Mercrian have put together certain packages that has special rates and conditions for the ones who are interested.

Getting back to the point of stimulating traffic from the first section,

"Packaging specific propositions is doable in this option if the provider is willing to help. As Mercurian we are collaborating with our clients by focusing precisely on stimulating traffic, and other areas of which we cannot speak publicly about as some are closed collaborations and others are in the early R&D stages." - Valery Abu Eid, MD at Mercurian.

The end.