Cryptocurrency Exchange
Cryptocurrency exchanges are platforms where individuals can trade one cryptocurrency for another, or for major global currencies (dollars, euros, rubles, yuan). It is the second most common way to obtain cryptocurrencies after mining, and currently the primary avenue for spending them, with the possible exception of cryptocurrency exchange offices.
Essentially, a cryptocurrency exchange is akin to a traditional electronic stock exchange. However, access to traditional exchanges is typically “reserved” for professional financial market participants, while cryptocurrency exchanges are generally open to the public. Exchange activities in the classical sense are strictly licensed by the state where the exchange is registered. In contrast, most cryptocurrency exchanges do not even operate as legal entities and exist in a legal vacuum.
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 technology for creating an exchange that is technically impossible to shut down (unlike 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 customer.
Payment Processing for Exchanges
Jurisdictional Considerations
For an exchange to operate effectively, it requires seamless integration with various payment systems to handle fiat currencies. While a cryptocurrency exchange can function without one or several payment gateways, it will be rendered uncompetitive.
Furthermore, the issue of deposit and withdrawal fees is crucial for any exchange. It is desirable to have your own universal gateway. This role can be effectively fulfilled 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 traditional banks struggle to do.
The requirement for technical integration gives rise to the need for legal integration, which, due to the varying status of cryptocurrencies and tokens, becomes a non-trivial task that we have already addressed and are prepared to update the results of our work for our clients.
Revenue Streams of Cryptocurrency Exchanges
The primary, and arguably the only “white” income stream for any exchange is commission fees. This refers to the commission that the exchange charges its clients for executing trading operations. Therefore, it’s not difficult to deduce that an exchange’s profit is determined by a simple formula: commission percentage multiplied by trading turnover.
However, in the case of cryptocurrency exchanges, there is an additional revenue mechanism – practically all exchanges levy an additional fee on their clients for withdrawing cryptocurrencies from the exchange. Payment gateways generate revenue from the withdrawal of fiat funds.
Exchange Profitability
Calculation
To estimate an exchange’s revenue, let’s take, for example, the currently largest American cryptocurrency exchange, Poloniex. By classical exchange standards, it’s not even a young exchange, but rather a newborn: founded in 2014. Below are the exchange’s trading volumes for major cryptocurrencies over different time intervals (daily, weekly, monthly):
For the sake of simplicity, let’s assume that the most democratic exchange commission today is 0.2% of the turnover. It’s not difficult to calculate that the daily turnover of the exchange for the 7 leading cryptocurrencies is $79,567,900. Multiplying this figure by 0.2%, we get: $159,135 – this is the exchange’s revenue for just seven currencies in a single trading day.
Market Making
Speaking of exchanges, it’s necessary to mention the largest exchange operators – market makers. In general terms, a market maker is a manager on an exchange whose responsibilities include monitoring the trading session and informing participants about changes in prices, rates, etc.
On an exchange, a market maker typically has an agreement under which they commit to simultaneously holding buy and sell orders with a spread not exceeding a predetermined amount for a certain period of time, in exchange for certain benefits from the exchange. In practice, this involves market making using their own index cryptocurrency.
Growth Driver
Unique Index (Know-How)
As mentioned above, the main responsibility of a market maker is to maintain two-sided quotes for an exchange-traded product. In this case – our own cryptocurrency (index). Given that our product is unique and practically devoid of any market price volatility, this provides a huge advantage for the market maker. When using a low-volatility cryptocurrency, the market maker is not exposed to the risk of sudden adverse market price movements. This means that they will always receive a guaranteed income from the spread (price difference) between buying and selling the currency.
It is important to note that while market makers have existed on traditional exchanges for decades and earn stable profits, the concept of a market maker on a cryptocurrency exchange is relatively new. High volatility and unpredictability are two key features of cryptocurrencies that deter aspiring 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 create your own cryptocurrency exchange or exchange office, we are ready to provide you with all the necessary documentation, as well as create a turnkey exchange. In the latter case, we would like to own a share in the business. Artem Arzamasin
Moscow, 2017