Cryptocurrency Exchange
Cryptocurrency exchanges are platforms where individuals can trade cryptocurrencies for other cryptocurrencies or major fiat currencies such as the US dollar, euro, Russian ruble, and Chinese yuan. After mining, exchanges are the second most common way to acquire cryptocurrencies and currently represent the primary avenue for spending them, with the possible exception of cryptocurrency bureaux de change.
Essentially, a cryptocurrency exchange is analogous to a traditional electronic stock exchange. However, unlike traditional exchanges, which are typically restricted to professional financial market participants, cryptocurrency exchanges are open to retail investors. Furthermore, while exchange operations in the traditional sense are strictly licensed by the state in which the exchange is registered, most cryptocurrency exchanges operate in a legal grey area and may not be recognised as legal entities.
Dear Sirs,
We have developed a practically applicable low-volatility index (the team includes a TOP-10 FOREX trader in the Russian Federation). We have also developed the technology for creating an exchange that is impossible to shut down technically (like BTCe in August 2017). This information is the “know-how” of Ecommerce-Payments.com. Such data is not for sale and will be used in the exchange project, which we will enter jointly with a fairly large client.
Payment Acceptance for an Exchange
Jurisdiction Link
For an exchange to operate effectively, it requires maximum integration with various payment systems for working with fiat money. A cryptocurrency exchange can survive without one or more payment gateways, but it will not be competitive.
In addition, the issue of deposit and withdrawal fees is acute for any exchange. It is desirable to have your own universal gateway. The role of such a gateway can be effectively performed by a Digital Bank based on an EMI license or a similar institution capable of opening sub-accounts for its clients and breaking the legal link between incoming and outgoing payments, which ordinary banks find difficult to do.
The requirement for technical integration implies the requirement for legal integration, which, due to the different status of cryptocurrencies and tokens, becomes a non-trivial task that we have already solved and are ready to update the results of the work done for our clients.
Cryptocurrency Exchange Revenue
The main, and perhaps even the only “white” income of any exchange is the commission fee. That is, the commission that the exchange charges its clients for carrying out trading operations. So, as it is not difficult to guess, the profit of the exchange is determined by the simplest formula: the commission percentage multiplied by the trading turnover.
But, in the case of a cryptocurrency exchange, there is an additional mechanism of the revenue part – almost all exchanges charge an additional commission from their clients for withdrawing funds in cryptocurrencies from the exchange. Payment gateways earn on the withdrawal of fiat money.
Exchange Profitability
Calculation
To estimate the income of the exchange, let’s take, for example, the largest American cryptocurrency exchange to date, Poloniex. By classical exchange standards, this is not even a young, but a newborn exchange: the year of foundation is 2014. Below are the trading volumes of the exchange for the main cryptocurrencies for different time intervals (daily, weekly, monthly):
For simplicity, let’s assume that the most democratic exchange commission today is 0.2% of the turnover. It is not difficult to calculate that the daily turnover of the exchange for 7 leading cryptocurrencies is $79,567,900. Multiplying this figure by 0.2%, we get: $159,135 is the exchange’s income for only seven currencies in just one trading day.
Market Making
Speaking of the exchange, it is necessary to say a few words about the largest exchange operators – market makers. In the general case, the meaning that the concept of a market maker takes on is a manager on the exchange, whose duties include monitoring the progress of a trading session and informing participants about changes in prices, rates, etc.
On the exchange, a market maker usually has an agreement under which it undertakes to keep simultaneously placed orders with a spread of no more than, again, the agreed value for certain benefits from the exchange for a predetermined period of time. In practice, we are talking about market making using our own index cryptocurrency.
Development Driver
Unique Index (Know-how)
As mentioned above, the main responsibility of a market maker is to maintain two-way quotes for a particular exchange product. In this case, our own cryptocurrency (index). Considering that our product is unique, almost devoid of any market price volatility, this gives a huge advantage to the market maker, because when using low-volatile cryptocurrency, the market maker does not bear the risk of a sudden unfavorable change in the market price. This means that he will always receive a guaranteed income from the spread (the difference in price) between buying and selling currency.
What is important to note: if market makers have existed on classical exchanges for decades and earn consistently, then the concept of a market maker on a cryptocurrency exchange is rather something new. Too much volatility and unpredictability are two key features of cryptocurrencies that scare away those who want to be market makers. But not in our case – the index is unique and will be a new step in the organization of the cryptocurrency exchange market.
If you are planning to set up your own cryptocurrency exchange or trading venue, we are ready to provide you with all the necessary documentation, as well as to create a turnkey exchange. In the latter case, we would be looking to take an equity stake in the business.
Artem Arzamasin
Moscow, 2017
