Market making is “creating a market” for different assets – this may be securities, stocks, or cryptocurrencies. Crypto market making services may be performed manually by individual traders who actively participate in the market, by institutions, able to drive large trading volumes, or by liquidity pools. In this article, we will consider the best ways to provide liquidity to the market of digital assets.
The Idea of a Cryptocurrency Market Maker
Market makers are active participants in the crypto market. They concurrently place quotes to buy and sell crypto assets, creating bid-ask spreads (the difference between the buying and selling price of an asset), from which they benefit. In such a way, they “create a market,” making sure there is always a buyer or a seller for a specific asset (a market maker) if there is no “natural” buyer at the moment. Thus, acting as buyers and sellers, market makers make crypto trading platforms liquid and attractive to traders. The higher the liquidity, the easier it is to buy or sell crypto, which also means price stability.
Forms of Market Making
Let’s discuss the existing forms of market making:
- Financial entities and brokers, that pour liquidity into crypto platforms, improving the global crypto attractiveness and adoption and generating profit for themselves.
- Automated market-making (AMM) – instead of manually submitting orders on trading platforms, some platforms use AMM programs that remove human participation and ensure near-instant and transparent traders.
- Decentralized MM – is used throughout decentralized crypto exchanges. Instead of order books, here they use liquidity pools for two traded assets. AMM quote is a price between these two assets. Those providing liquidity to the liquidity pool automatically become market makers (liquidity providers), whose income correlates with the size of liquidity they provide.
Whether it is large risk-managed financial entities, family offices, companies with huge financial potential, or individual traders who engage in high-frequency trading, all of them benefit from their services. That may include liquidity pouring, cutting big-ask spreads, and ensuring a smooth and stable trading environment for other market participants. In return, they often receive rebates and low fees, as well as arbitrage opportunities.
Being a market maker in the crypto market can be challenging and requires specific skills, resources, and risk management capabilities. You should possess significant capital to effectively provide liquidity, manage risk, and grasp the fundamental aspect of market making. Also, make sure you can use sophisticated algorithms to automate order placement and risk management. Developing and maintaining these algorithms requires expertise in quantitative finance and programming.