Does the popularity of cryptocurrency exchanges businesses have any basis?
Vasily Alexanderev, CEO UpTrader
A steady trend has emerged to open new crypto-exchanges ever since the ICO boom in 2015-2017. In an era of large amounts of crypto on the open market, entrepreneurs raised capital through ICO. This significantly reduced their risk when investing in their own funds. This trend is understandable. However, it is now financially difficult to launch crypto-exchanges. Forex CRM provider UpTrader receives regular requests from clients to purchase a White Label Crypto Exchange, or develop one ourselves. We make sure to refer such clients to partners, but what drives today’s businessmen? It’s a profitable venture or just a trend.
There is competition on the exchange markets
Many exchanges exist. These exchanges have grown to be ubiquitous over the past few years. CoinMarketCap (CMC) is the largest crypto exchange listing. There are over 300 entries, with many others still waiting to be added. Binance is currently the biggest exchange in terms of trading volume. This is followed closely by HitBTC, Coinbase and Huobi. It also includes exchanges that do not have trading volumes. This is paradoxical, as trading volume is one of CMC’s listing requirements. You will have to either increase your volume or use clever, expensive methods to avoid the listing requirement if you exchange is not listed during simpler times.
It is worth it to be included in the CMC Listing.
You will need to have a CMC cherished listing in order for tokens to be listed on your exchange. CMC will send the price of your token to that page. This is precisely what token owners require. The listing can have a major impact on your reputation and increase the value of the exchange. It also motivates investors and helps you attract traders. Trades are essential for traders. This raises the question, “Where would volume come from if there were no traders?” This creates a vicious circle, with traders without volume but no volume without traders.
Buy liquidity on another exchange is one way to boost trading volume. The same thing works for Forex. But it doesn’t quite work. There is an enormous difference in the liquidity available to Forex traders, especially if they have licenses from major jurisdictions. Although they have better terms, brokerage companies must maintain an infrastructure that is complex and ensure certain volumes of trading. They can resell the product to traders at a markedup while still offering competitive terms. It is difficult to get clients in the crypto market because everyone is equally competitive. You will not be able to sell liquidity on an exchange if your trading conditions are worse.
What if they succeed? It is profitable?
Your profitability won’t be as good even if they do. Forex trading uses leverage. That is when a client transacts with an amount that is 100 times greater than their funds allow. Brokers receive commissions for this entire transaction. The exchange does not have leverage. This means that the broker’s commission is determined solely by the client’s turnover. This means an exchange may easily turn into a loss-making venture due to all of the expenses involved in buying liquidity, recruiting clients and paying salaries. Forex offers many legitimate profit opportunities, not only the high commissions but also the possibility of B-book. When trading takes place within the firm at market prices, it is possible to earn very good profits. This allows brokers to earn good money, while maintaining a solid reputation and providing excellent conditions.
What other choices are available?
Crypto futures trading is a way to make a living in the cryptocurrency market. It combines margin trading from Forex with digital assets. Leverages are usually not as high as on Forex – about 1:20, but still, it allows you to get 20 times more trading volume from a client and have a B-book.
What amount would you require to start an exchange?
If you still want an exchange, then let’s make some calculations.
A White Label would cost between $30,000 to $50,000 and the development of your own brand will set you back at least $100,000 to 200,000. At least 10 staff are required to manage your business: managers, designers, market specialists and technicians. Since costs vary widely depending on where they are located, we won’t list them here. On average, it will cost $1 million to promote the exchange in order to get the necessary trading volume. We are concerned about those who assume they can keep their marketing budgets at 50-100,000. It will lead to wasted money, frustration, and ultimately the dissolution of the project. There are many exchanges with names that are only known to the owners. This is due to almost all of them trying not to spend enough money or saving on marketing. Fame is expensive in today’s world. You cannot afford to tweet about how much you invest in Tesla development or Space Shuttle construction. Promotion should be budgeted.
What is required to offer crypto futures trading
You will need to have the same software and services for crypto futures trading as a Forex broker in order to offer it. Many small Forex brokers are operating in remote parts of the globe, and they have been able to survive. The first is that the process of launching a broker has become much easier and less expensive over the years. In 1995, it was quite expensive to start a broker. To buy MetaTrader 4 you had to spend $100,000. Another $200,000-1 million for Forex CRM, website and marketing work. It is now possible to open a broker from $5,000-10,000. The current brokerage market is flooded with software that can be purchased. These include all types of investment services (PAMM/MAMM, LAMM/social trading, Forex CRM, and Forex CRM), as well as ready-made marketing bonus programs and affiliate programs. It is easy to set up your business as a building block. We have witnessed a rise in interest in this market in recent years. This has led to a shift in clients’ preference towards smaller local businesses over larger ones. Importantly, UpTrader’s data show that 90% of those companies survive.
It is possible that we may witness the same trend within the crypto market ten years from now.
However, now it’s more prudent to invest in businesses with predictable profitability and higher chances of survival than in unqualified competition such as Binance.
Pixabay image by Bianca Holland