What is Crypto Market Making?

Cryptocurrency has become a popular investment opportunity in recent years, with many investors flocking to the market in search of high returns. However, the volatile nature of the crypto market can make investing in digital assets risky, with sudden price fluctuations and illiquidity posing significant challenges. This is where crypto market makers come in, playing a crucial role in ensuring market stability and liquidity.

In this article, we will explore the world of crypto market-making, including what it is, how the crypto market making strategy works, and actually why use a crypto market maker. So, let’s dive into the world of cryptocurrency market-making and learn how it can benefit investors and token projects.

What Are Market Makers In Crypto?

Market making in crypto has a significant role to play, just like their counterparts in traditional finance. These entities, often specialized trading firms or financial institutions, use their capital to buy and sell cryptocurrencies. Thereby, they provide necessary liquidity to the market. This continuous flow of buying and selling activity ensures that trades can be executed swiftly without causing significant price fluctuations, thus stabilizing the crypto market.

Crypto market makers use advanced algorithmic trading strategies to maintain an active presence on both sides of the order book, helping to narrow the bid-ask spread. Spread is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.

Necessity of Using Crypto Market Makers

The necessity of utilizing crypto market making services arises from the volatility and sometimes illiquid nature of cryptocurrency markets. Market makers reduce these challenges by enhancing market depth and liquidity. This, in turn, facilitates smoother transactions and more stable prices for traders and investors. Market makers are essential for both large-cap assets such as BTC (with a market cap of $ 1,283.65 billion), DOGE (Dogecoin market cap is $23.73 billion), and others, as well as for low-cap assets that require trading volume increase.

How Crypto Market Makers Work

Crypto market makers function by setting up a crypto market making strategy that includes maintaining a list of buy and sell orders. This strategy involves calculating and constantly adjusting the quantities and prices of these orders to reflect the current market conditions. The goal is to minimize the spread and prevent large price gaps, allowing other traders to execute their trades efficiently and at fair prices.

Let’s see how the symmetric market making strategy in crypto works, taking the DOGE coin as an example. This strategy involves continuously placing buy and sell limit orders around the current market price to capture the bid-ask spread while providing liquidity. How this might work for DOGE with its present price of $0,16:

1. Set fixed spread. The market maker decides on a fixed percentage for the spread, say, 0.2%.
2. Calculate bid and ask. 

Ask price: $0.16 + 0.2% of $0.16 = $0.16032

Bid price: $0.16 – 0.2% of $0.16 = $0.15968

1. Place orders. The market maker places buy orders at the bid price and sell orders at the ask price, aiming to capture the spread between these two prices.
2. Adjust orders. As market conditions change or as orders are filled, the market maker continuously adjusts the bid and ask prices to maintain the set spread around the new market price of DOGE.

This strategy allows the market maker to provide liquidity, facilitating trades by always being ready to buy or sell DOGE. They profit from the spread while helping stabilize the price through continuous trading.

When To Use a Crypto Market Maker

Deciding when to use a crypto market maker is critical for token projects at any stage of their lifecycle. From the initial launch on trading platforms to mature phases where sustaining investor interest becomes challenging, market makers provide the liquidity and stability needed to attract more retail and institutional investors.

For new tokens, especially when listed on decentralized exchanges, market makers can protect against price manipulation and ensure fair trading conditions right from the start. Furthermore, in scenarios where market sentiment is rapidly shifting, market makers help maintain order stability and depth, which is crucial for the health of the cryptocurrency.

In addition, cryptocurrency market-making services are indispensable for planning token listing. Tokens with high trading volume (provided by market makers) are more welcomed to large and reputable crypto exchanges.

The role of market-making in crypto should not be ignored, especially by projects that seek to increase their visibility and accessibility through new listings on additional exchanges. They also play a defensive role against potential market abuses, such as sniper bot attacks during listings on decentralized platforms.

Overall, the decision to engage a market maker should align with the project’s broader financial and growth strategies. Market makers foster a robust trading environment that benefits all market participants – investors, exchanges, and token projects.