The global crypto industry has evolved into one of the world’s most lucrative avenues for success and remarkable gains. Even skeptics cannot ignore how traders in the financial markets have achieved success by trading with crypto instruments and delivering spectacular returns. Derivatives trading is a part of this. As derivatives trading derives its value from a significant underlying asset, it is more adaptable and accessible, attracting users. Leverage is also frequently used in the cryptocurrency derivatives markets. In this article, we will provide insights on the Lenous Protocol regarding 7 Tips for Starting a Cryptocurrency Derivatives Exchange.

Derivatives trading often determines the future prices of cryptocurrencies, as well as stocks, commodities, and other assets. Approximately a quarter of the entire cryptocurrency trading volume is executed on exchanges that trade in crypto derivatives. However, due to the volatility of the cryptocurrency market and insufficient liquidity, trading derivatives can be challenging and risky.

In this article, we will explain in more detail what cryptocurrency derivatives trading, along with the crypto derivatives exchange, means. We will also focus on some solid tips for starting a successful cryptocurrency derivatives exchange.

What is Cryptocurrency Derivatives Trading?

Derivatives trading is the exchange of contracts between buyers and sellers, obligating them to sell or buy an asset at a specific point in time. The derivatives used in connection with cryptocurrencies are Futures, Options, and Perpetual Swaps.

Firstly, it is important to clarify derivatives to better understand derivatives trading. A derivative is an agreement between a buyer and a seller to exchange an underlying asset at a specific price. By agreeing to a contract based on the underlying cash price of, for example, Bitcoin or any other cryptocurrency, traders can hedge positions to minimize price fluctuations.

Notably, this is one of the oldest existing financial contracts, as derivatives trading gained momentum in the 1970s. Moreover, current reports suggest that the public is increasingly interested in trading cryptocurrency derivatives to protect against market volatility. For instance, in May 2020, the monthly trading volume for crypto futures reached a record high of $602 billion.

Now, let’s take a closer look at the key types of cryptocurrency derivatives tools.

Futures

Futures contracts are the most widely recognized derivatives. They enable sellers to sell an asset at a specific price in the future and buyers to buy an asset when they agree on a specific date. The majority of traders settle their profit or loss from their futures contracts before the contract expires. Traders typically use a futures contract when trading in a risky market, which the cryptocurrency market certainly is, to protect other investments.

Options

Options, another type of derivative, provide the ability to buy or sell an underlying asset at a specific price by the expiration date. However, option contracts do not contain any obligations.

Furthermore, there are two categories of option contracts:

1-A Call Option: It gives buyers and sellers the right to set a price and timeframe for purchasing an asset.

2-A Put Option: It allows traders to sell an item at a specific price and time.

Now that it is clearer what crypto derivatives are, let’s take a closer look at the fundamentals behind the exchange of crypto derivatives.

What is a Cryptocurrency Derivatives Exchange?

Such exchanges differ from others in that they provide derivatives for cryptocurrencies, which are implemented in the form of contracts that you can buy or sell based on your expectations for the value of the underlying cryptocurrency. As mentioned earlier, this allows you to avoid holding the actual crypto asset and instead protect your position from market volatility.

Even the best cryptocurrency exchanges offering futures trading experience overload issues and stagnant transaction times. To ensure they don’t miss out on a lucrative trading opportunity, traders should opt for a cryptocurrency derivatives-focused exchange for trading crypto futures.

Many cryptocurrency exchanges that have started as spot exchanges have modified their trading platform to support derivatives trading. It is worth noting that these are some of the largest cryptocurrency exchanges, but they do not provide their derivatives traders with the same level of security and accessibility. As the sector fundamentally differs from spot trading, specialized crypto derivatives exchanges are required to enhance the trading services.

Additionally, like any reputable cryptocurrency exchange, the cryptocurrency derivatives exchange must offer features such as:

A) Security – Every company in the cryptocurrency industry must implement robust security measures. In addition to cold wallets, which are more reliable than hot exchange wallets, they should also include an additional security layer such as KYC and 2FA, and more.

B) Leverage – In crypto derivatives, leverage refers to borrowing money from an exchange to increase one’s capital to profit more from price volatility. However, it is important to recognize that trading with leverage carries immense risk, and the best risk management techniques must be used to prevent liquidation.

C) High Frequency – Some exchanges hinder traders from selling their assets during volatile times. As so many people are executing trades simultaneously, this is the main problem common to all exchanges. A dedicated cryptocurrency derivatives exchange with faster transaction speeds could be helpful in effectively solving this issue.

Now that the theory is clear, let’s move on to the main topic of this article and analyze tips for starting a successful cryptocurrency derivatives exchange.

1-Conduct your research and planning

There are various cryptocurrency exchange platforms for cryptocurrency trading. In our case, we have already taken the very first step and decided to work with cryptocurrency derivatives trading.

The next step you should now take is appropriate market research and planning.

As with other projects, you should conduct thorough market research to feel more confident and have a clear focus on what you want to achieve. Conduct research to determine the current trends in the cryptocurrency market and the estimated value of cryptocurrencies in the coming years. Based on this information, you can, for example, select which cryptocurrencies or tokens you can offer on your exchange. Also, find out what features traders are looking for in a cryptocurrency exchange. Then start a cryptocurrency exchange by integrating the most in-demand services. Consequently, you will be able to expand your user base and revenue-generating prospects.

2-Implement key crypto exchange components

The creation of software for the exchange of cryptocurrencies involves the implementation of several different components into the platform, including:

A) User interface – A cryptocurrency exchange should have a precise design. It should be easy to understand and use, as well as visually appealing. The user interface should be simple to attract users. Therefore, make it a priority, as it is the first impression of your platform.

B) Matching engine – Such a tool is responsible for matching buy and sell orders. A powerful matching engine can quickly match buy/sell orders and enable fast transactions. A robust matching engine will help you attract and retain more traders and increase revenue.

C) Liquidity – This is a critical factor that influences the selling or buying trend of an asset. It is more likely that traders will visit your exchange if it has significant liquidity. You can increase your liquidity in many ways by allowing users access to multiple order books, adding additional payment channels, and listing alternative cryptocurrencies on your exchange. Trading bots are another method often used to achieve high liquidity on an exchange.

D) Crypto wallet – Every crypto asset must be stored in a crypto wallet. A secure wallet must be connected to a crypto exchange to store and transfer cryptocurrency on the network. You should provide your platform’s customers with a multi-currency wallet so they can store all their digital assets in one place.

3-Build a team of experienced professionals

As mentioned above, during the development of the exchange, you need to implement an efficient and reliable trading engine, secure crypto wallets, and a user-friendly interface, and ensure sufficient liquidity. It is a challenging process, and you may need an expert team to assist you in the development of your project.

Look for professionals who have a strong background in exchange creation. These experts always come prepared with specialized equipment and advanced software knowledge.

For interested parties, you will always find a dedicated development specialist who shares the enthusiasm and the idea with other members of your development team. A loyal and enthusiastic team will never leave you alone, contributing to your success.

Establishing a solid long-term relationship is crucial, as your system will need to be maintained and updated to keep running. Also, don’t forget to create a budget to cover occasional costs and salaries.

4-Create a user-friendly platform

You have two options when starting a cryptocurrency exchange.

A) Start from scratch
Consider this option only if you have an experienced team and are prepared for a long, costly development process. Remember that this process can take at least a year and requires significant resources and effort. Additionally, your project will also need to undergo security and regulatory compliance checks.

B) Implement a white-label solution

You could also save time and more easily start a cryptocurrency exchange business – this is an increasingly common choice. It is cheaper to buy a pre-built product than to build your platform from scratch. A white-label solution is part of a universal software that you can use to create your exchange. Carefully select the companies that offer completed projects if you want a ready-made product that meets all your requirements and has no technical issues.

Therefore, companies that are having difficulty finding critical components such as crypto liquidity or the trading engine, for which there are no suitable alternatives, should pursue a white-label solution. Another advantage of this strategy is the adaptability of the program to specific requirements and the implementation of the company’s branding.

5-Find reliable business partners and providers

Liquidity is a factor that drives the market. For this reason, you need to find a strong and reliable liquidity provider. Currently, there are many companies offering liquidity provision. They often provide a global LP network, a wide selection of fiat currencies, and extensive order books. While you work on the development process, these companies can connect with your exchange without additional effort or involvement on your part.

Assuming you are building your exchange from scratch. In this case, you should research and thoroughly vet each liquidity source to ensure it meets your specific currency requirements, is reliable, and not susceptible to outages or security issues.

If you want to use a white-label solution, you already know the benefits. Considering that customers seriously evaluate liquidity while deciding on a business they want to use, the implementation of a white-label cryptocurrency exchange helps them benefit from the pooled liquidity provided by the software vendor.

6-Fundraising

Many young businesses struggle with this dilemma when allocating capital. It seems that venture capital would surround you if your business idea is innovative and exciting, with the potential for significant future growth. Whether you need a venture capitalist to support your business investment is entirely up to you. There is a possibility that you can start an exchange with little out-of-pocket money if you find a solid investor.

However, keep in mind that adequate capital is required for any serious brokerage. The initial capital can also come from your savings or close friends. Remember, before going public and seeking investors, ensure that you have completed your research and roadmap 100%, so you can present it to those who may invest their money in your project.

7-Marketing & PR

No one will know about your project if you don’t communicate that you’re starting a cryptocurrency exchange. To gain momentum and attract consumers, you need to promote your exchange in the target market. You may receive marketing support from the white-label company that assisted you in developing your crypto exchange. Their qualified marketing personnel can create clever marketing plans to promote your exchange. Use multi-channel marketing to expand and reach your audience.

You can market your exchange with the following advertising strategies. Each has its own unique characteristics and requirements:

Content marketing
Social media marketing (Facebook, Instagram, LinkedIn, etc.)
Pay-per-Click (PPC)
Collaborate with top crypto news sites and blogs
Share it on forums (Reddit, Quora)

Conclusion

Cryptocurrency derivatives offer many opportunities to make money in the crypto market. However, without a proper planning approach to using crypto derivatives, users will experience challenging times. Trading in derivatives involves a variety of risks, so a trader should evaluate and understand these before conducting their first trade.

If you are ready to start a cryptocurrency exchange business, follow all the critical steps. Cryptocurrency trading platforms are becoming increasingly popular in the business world, and a considerable number of startups and entrepreneurs have made their initial investments in crypto companies, either as a secondary income or as a primary business. Therefore, the time is ripe for you to start your cryptocurrency exchange business by implementing the processes mentioned above. Also, consider white-label solutions, which can significantly help your business grow by saving a lot of capital and time.