Crypto market making is an activity where a company or person submits large volumes of bid and ask limit orders to a cryptocurrency exchange; serving as an important component in facilitating liquidity. This is a vital service to crypto traders who need the liquidity provided by market makers in order to execute their trades quickly and efficiently.
The process of market making is a complex, technical process that involves sophisticated algorithms and a dedicated trading professional. The algorithmic trades made by market makers are based on quantitative analysis of market conditions. These include asset volatility and trading volume, which in turn determine how many trades are necessary to generate a profit.
Market makers provide liquidity for crypto assets through their liquidity products, supported by fully automated software algorithms. These algorithms monitor the markets and respond to changing trends by taking a position in a given asset and then making trades on their behalf, ensuring that there is always enough demand for the asset to meet market liquidity requirements.
Liquidity is critical to the success of any market, particularly in the volatile cryptocurrency space, where price fluctuations can occur at a moment’s notice. As a result, the services of algorithmic market makers are an essential part of crypto’s infrastructure.
There are several types of market makers in the crypto market, and each type has a distinct set of responsibilities and rewards for its work. The best crypto market makers use proprietary software that runs thousands of transactions per day, while a dedicated trader keeps an eye on the market and ensures that the algorithm is generating optimal returns for clients.
Most good market makers offer a fixed spread that remains constant over a set period of time. This allows them to generate consistent profit margins over the duration of their contract with a client.
Some market makers are able to make more than the spread, but there are instances when they can lose money because their orders reverse at a lower price than they initially agreed on. When this occurs, it’s called impairment loss and a market maker can lose a significant amount of capital.
Crypto market making is a growing practice in the crypto industry, with more and more market makers submitting orders for digital assets on centralized exchanges. This has increased the liquidity of these exchanges and led to an influx of institutional investors into the sector.
As the crypto market evolves, so too does the role of market makers and their importance in the ecosystem. This is an exciting and dynamic space that has the potential to become a truly global financial system, as more traditional financial institutions invest in the crypto space and seek out the services of market makers to help them navigate and participate in this new world.
There are two main types of market makers in the crypto space – ICO-stage projects and professional firms who provide market making services to more established cryptocurrencies. During the ICO phase, projects that haven’t yet reached a mainstream level employ market making services to create liquidity for their tokens.