A healthy market environment is built when there is a healthy balance between supply and demand for assets. It does not matter which market we take – be it traditional stock or crypto; liquidity stands as a lifeblood for a favorable trading environment. Illiquid markets are never efficient – you can’t sell or buy assets at a fair price and it takes too long to find a counterparty for a deal. In this article, we will focus on market making in crypto and explain how it takes place and who takes this role.
Cryptocurrency Market Making
Market makers are crucial players in the crypto market. Their task is to continuously place orders for buying and selling assets, ensuring their readiness to fulfill any arising order immediately. It’s a tough job, as the crypto market is highly volatile, so market makers should also manage risks and use hedging tools to protect themselves from financial losses.
By continuously quoting buy and sell prices for various cryptocurrencies, market makers add sufficient liquidity to the market. This helps ensure that there are readily available buyers and sellers, reducing bid-ask spreads and promoting smoother market operations.
Here are the most common market maker services:
- Automated trading. Investors often use automated trading tools that increase trading volumes and trading intensity. Market market makers, on the other side, are always ready to buy or sell an asset of any volume. This enables investors to trade quickly and efficiently with no delays.
- Hotlink orders. Due to configurable APIs, market makers enable traders to pour liquidity into crypto exchange assets from other exchanges like Binance or Huobi.
- Consistent spread. Market makers shorten spreads (buy/sell price difference), making a more favorable and attractive environment for other retail and institutional traders.
Who Can Be a Market Maker in Crypto?
An organization, financial company, bank, brokerage house, institutional investor, or high-frequency trader that provides liquidity to a trading platform and earns the profit from bid-ask spread is a crypto market maker. Efficient market making requires an in-depth understanding of trading and investment, choosing a proper crypto market maker strategy, and the ability to adjust it to new market conditions. Sometimes, even individual traders can act as market makers.
Before partnering with a crypto platform, a potential market maker is checked for compliance with regulations, licenses, and audits. Also, some exchanges have a threshold of capital with which institutions can engage in market making.
