Market Maker in Cryptocurrency

Market Maker’s Role in Cryptocurrency

A market maker is a trading participant who has the expertise, technology, and capital to regulate supply and demand in the market. This role can be performed by a financial institution (bank, broker) or an individual in cooperation with exchanges and cryptocurrency companies. There is also automated cryptocurrency market making (AMM) based on smart contracts, which decentralized trading platforms mostly use.

Imagine the situation:

A new token appears in the listing of an exchange. In the first few days, its exchange rate may be unstable. Due to low liquidity and traders’ chaotic actions, trading volumes may drop to a critically low level, and there may be a large difference between the buy and sell prices. This is an undesirable situation both for the exchange and the token issuer. To avoid it, they resort to the services of market makers.

The goal of market making is to increase the availability of crypto assets, reduce the volatility of their prices, and prevent market manipulation.

What Do Cryptocurrency Market Makers Do?

The following activities help achieve their goals:

• Stimulating the flow of orders: a market maker is always ready to buy a certain asset from those who want to sell it or sell it to those who want to buy it.
• Spread control: market makers make sure that the gap between buy and sell prices is minimal, helping to avoid sharp spikes and dips.
• Activity monitoring: market makers react to attempts of exchange rate manipulation, such as mass buying or selling.
• Brokerage: if an exchange lacks the liquidity to execute a large trade, a market maker can execute it off-exchange, using its resources and liquidity to fulfill the order without significantly impacting prices.

Crypto Market Making Strategies

Market makers employ active and passive strategies to effectively fulfill their tasks and earn money. 

Limit order placement

Market makers select price levels and place limit orders on them. When other traders place orders against them, market makers profit from the price difference. 

Data Analysis

To dynamically adjust the rate, market makers use statistical models and algorithms and conduct a fundamental analysis of the crypto market. 

High-frequency trading 

The strategy involves concluding a large number of transactions at high speed to increase market liquidity. 

Inter-exchange arbitrage

The rates of the same asset may differ on different exchanges. A crypto market maker can use this feature to make profits and smooth prices. To do this, they need to buy a coin cheaper on one platform and instantly sell it more expensively on another. 

The Influence of Market Makers on the Crypto Market

No matter how volatile the cryptocurrency market is, market makers try to make it more stable. They reduce the difference between the buy and sell price, protect traders from the risks of manipulation, and increase the visibility of new assets.

Risks and Obstacles of Market Making in the Crypto Sphere 

Market makers in crypto may face challenges such as: 

• Loss of capital due to unpredictable price fluctuations;
• Wide spreads due to low liquidity of new assets;
• Restrictions due to regulatory approaches in different countries;
• Disruptions due to technical failures and cyber-attacks.

Market makers must be prepared for rapidly changing market conditions. The impact of obstacles can be minimized by using strategies to manage risk.

Conclusions

1. A market maker, in simple words, is a market participant who helps maintain market stability and liquidity. This role can be played by either a legal entity or an individual.
2. The main tasks of a crypto market maker are protection from manipulation, ensuring the availability and visibility of assets, and reducing the gap between buy and sell prices.
3. Market makers use active and passive strategies to fulfill their role and generate income.Key obstacles are low liquidity, high volatility, regulatory constraints, and technical challenges. 

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