Market making in cryptocurrency refers to the practice of providing liquidity to the market by continuously buying and selling cryptocurrencies at publicly quoted prices. Market makers are crucial in ensuring enough trading volume on an exchange for trades to occur without significant price changes.
Benefits of Market-Making Service
Operating on centralized crypto exchanges, market makers participate in a market making program, where they get fee discounts and rebates for their activity. Market makers continuously submit buying and selling orders at specified prices. It creates a two-sided market, ensuring that traders can execute transactions promptly without waiting for a matching order from another party.
Makers allocate significant capital to cover the range of buy and sell orders, enabling them to fulfill large volumes of trade requests and contributing to the market’s depth.
The difference between the buy (bid) and sell (ask) prices, known as the spread, is where market makers earn their profits. By setting these prices themselves, they cover operational costs and risk while facilitating liquidity.
Benefits that crypto exchanges get when working with a market maker:
- Improved liquidity. Market makers enhance the liquidity of cryptocurrencies, making it easier for traders to execute orders without causing drastic price movements.
- Reduced volatility. By providing constant buy and sell orders, market makers help stabilize the prices of assets, reducing market volatility.
- Efficiency growth. The presence of market makers increases market efficiency, ensuring that prices reflect the latest market information.
- Fair prices. Market makers facilitate more accurate price discovery by bridging the gap between supply and demand.
Types of Crypto Market Makers
Here are the main types of market makers in the crypto market:
- These firms or individuals specialize in market-making in traditional financial markets but have extended their services to include cryptocurrencies. An example is Jump Trading. Initially focusing on traditional financial markets, Jump Trading expanded into crypto.
- Crypto-native. Firms that originated within the crypto space and focus exclusively on providing liquidity to crypto markets. An example is Alameda Research, founded with a focus on the cryptocurrency market.
- Use sophisticated algorithms to automate trading strategies, offering liquidity across various cryptocurrency exchanges and assets. An example is GSR, which specializes in algorithmic trading and market making.
- DeFi market makers. Operate on decentralized platforms, using smart contracts and protocols like automated market makers (AMMs) to provide liquidity in a decentralized manner.
Market makers play a crucial role in bringing liquidity, stability, and growth to the cryptocurrency market. With different types of market makers, crypto exchanges can benefit from their expertise and unique strengths. It makes it easier for traders to execute orders without causing significant price movements.
