Cryptocurrency trading refers to buying and selling assets following a strategy that allows to gain profits amid crypto price fluctuations. Since the crypto market is highly volatile, it opens enormous earning opportunities for traders. When you place an order to buy or sell crypto on a trading platform, it is usually executed in a matter of minutes. Considering that your decision to buy or sell assets is backed by the analysis of the current market situation, why should someone be willing to fulfill your trade and act against the overall logic of selling or buying at this moment in time?
And what if nobody is willing? In the case where there are no organic counterparties for a trading order, a market maker comes to the scene. What is market making in crypto and how does it work? Let’s discuss these topics in this article.
Who Acts as a Crypto Market Maker?
Market makers are employed by crypto exchanges to participate in a crypto market-making program and ensure efficient trading and the required liquidity level. Crypto market makers are high-frequency traders of financial entities that place both buy and sell orders in an order book for a particular asset to provide liquidity and a smooth trading environment in the market. Maker makers act as both buyers and sellers when a corresponding order arises.
Here are the types of market makers:
- Profit-driven market makers – institutions and traders that use their own capital.
- Designated crypto market makers – companies that use their clients’ capital for trading.
Is It Profitable to Engage in Cryptocurrency Market-Making?
Crypto market makers generate income by setting a spread between the buying and selling prices. They aim to purchase a crypto asset at a price lower than the current market rate and sell it at a price higher than the current quote. The gap between their buying and selling prices is known as the spread and constitutes a market maker’s profit.
Providing cryptocurrency market-making services can be profitable for those who effectively manage risks and execute well-informed strategies. While market makers generate income from the spread, profitability depends on factors such as market conditions, trading volumes, and the ability to minimize risks associated with price fluctuations.
Why market makers are considered the dark side of the market
There are a large number of participants in the crypto industry, whose influence on the cryptocurrency rate is invisible to ordinary users. When market makers began to appear on the blockchain, many traders began manipulating the market. Therefore, they began to be considered representatives of the “dark side” of the crypto industry. But even earlier, market makers began to manipulate the stock market. Below we have provided examples of the largest speculations in history.
In 1987, during Black Monday, market maker Andy Krieger crashed the New Zealand currency and earned $300 million in one day. This almost caused a political scandal, and the country had to recover over several years.
And one of the most famous financiers, George Soros, went down in history as “the man who destroyed the Bank of England.” All because in 1992 he speculated in British pounds sterling. As a result of Black Wednesday, he withdrew more than $1 billion from the country’s economy in one day.
All these events, as well as the machinations of modern market makers, greatly worsen the reputation of the entire industry. But in the modern market, not a single project will develop without them. Therefore, there is a need for market makers.
Market making sphere
The development of trading software is important for the market making industry, but the role of traders is no less important. Exchanges often experience API outages, so pure robotic trading is not possible. At these moments, the market maker begins to trade manually. Therefore, any project needs a personal trader or operator who monitors market changes.
Market makers are divided into 2 types: those working with exchanges and those working with projects. We will talk about them in more detail below.
The role of market makers on cryptocurrency exchanges
A market maker provides market liquidity and helps traders sell assets. For example, an exchange user buys some altcoin and tries to sell it on an illiquid exchange. He places a sell order and is immediately bought.
The average user thinks that transactions on exchanges are concluded very quickly and take place between ordinary traders. But in 90% of cases, orders are purchased by market makers for the purpose of further resale. They are available on every site to ensure its liquidity. Otherwise, users would have to wait weeks for a buyer of the asset.
The role of market makers in projects
In 2019, CoinMarketCap introduced a new rating system. To raise the rating, the exchanges began to impose certain conditions on projects. Now they needed to regulate the price of their tokens, the volume of sales and fill out order books. The difficulty of independently complying with the conditions has led to the development of the market-making market.
Large exchanges do not have the task of developing the projects themselves – it is more important for them to collect commissions from users for operations. Therefore, platforms impose certain conditions on companies to maintain liquidity. It is very difficult for startups to meet these parameters and they leave the market.
Most developers and market participants believe that a good project will sell itself. But the potential audience of the projects is much larger than the audience that is actually ready to trade various digital assets. Entry-level exchanges do not have a sufficient audience to sell tokens. Therefore, when listing new coins on sites, they do not have transactions. But projects need to create the appearance that bidding is taking place. For this purpose, market makers are hired.
Market makers work with clients
A personal trader is assigned to each customer project. They train the team in the basics of working on the stock exchange for six months. After this, they are given working tools with which the company’s personal traders can engage in market making.
In 99% of cases, the team needs to train their clients to work in the market from scratch. Customers do not understand what exchange activity is and how to conduct it. Most projects never make it to market due to incorrect tokenomics and unrealistic requests.
Not all customer orders can be fulfilled at any time due to different economic situations in the market. For example, the project sets the task for market makers to keep the exchange rate at one dollar. But the Bitcoin rate is falling and dragging the entire market with it. People start withdrawing the project token, it drops in price, but there are no new buyers. A personal trader begins to explain to customers that it is pointless to complete a previously assigned task.
Difficulties of market making
Lack of awareness among startups
New projects come to the exchange independently, without market makers, and fail. At the same time, it is difficult to find information on market making on the Internet, so teams cannot create a working strategy.
A large number of bots on cryptocurrency exchanges
They “hunt” for deposits, so they create a big problem for new projects. The market maker’s task is to save the budget deposit; various programs are created for this purpose. But stock exchange bots are constantly evolving and market makers are forced to regularly make improvements and changes to their working tools. All this is necessary to protect the project’s finances from attacks by new bots.
Inexperience in working with bots
Some projects decide to independently buy bots for trading on the stock exchange. But they set up their work in such a way that they keep the price of the token at the same level. They do not take into account market changes and complete the task, but the order book is filled and the entire deposit is “drained.”
Changes in market making over the past few years
More information began to appear about market makers. Projects began to understand a little about this area and realized that they needed their own specialists. There are more and more teams that understand the basics and come with more realistic requests.
Currently, competition in the field of market making is growing. Agents who used to help with listings on exchanges are switching to market making and flooding the market. This area is constantly evolving and will continue to change in the future.
Conclusion
Crypto market makers play an important role in ensuring liquidity and facilitating efficient trading in the highly volatile crypto market. By setting spreads between buying and selling prices, market makers aim to profit from price differences. Market-making can be profitable for those who navigate risks effectively and employ proper strategies, which, in turn, requires extensive experience in financial markets.