The cryptocurrency market is highly volatile, which means an unstable demand-supply balance and a possibility of sharp price movements. Because of these factors, most institutional investors have remained on the sidelines for many years since the crypto inception.
However, over time, companies started to show interest in new technologies and financial tools offered in the crypto industry. Not to remain behind competitors, banks started to implement crypto trading desks, payment companies – added crypto as a settlement method, tech companies poured billions in Bitcoin, etc. Altogether, it pulled crypto to the institutional level.
Institutional adoption requires the same level of services, and the question of volatility still remains at the forefront. The role of market makers on an institutional crypto exchange is the same as in traditional markets – facilitating a stable trading environment, a predictable market, and providing liquidity. So, let’s take a closer look at market making in crypto.
How Does Market-Making Work?
An essential role of a crypto exchange market maker is pouring liquidity into the market by continually placing orders to buy and sell assets, ensuring a smooth trading process. Market makers are always ready to fulfill the orders of other market participants, be they institutional or retail traders. Sometimes, when an order is too big, several market makers are needed to process it. One way or another, the market makers’ presence in the market ensures the trades occur quickly and at a fair price.
Here are crypto market-making services:
- Continuous quoting on the order book, contributing to market liquidity.
- Narrowing spreads and reducing the difference between the highest bid and lowest ask prices enhances market efficiency.
- Providing liquidity for new tokens, facilitating trading activity, and supporting new listings on exchanges.
- Customized trading solutions and services to institutional clients based on their specific needs.
- By contributing to liquidity and narrowing spreads, market makers help reduce overall transaction costs for traders.
Crypto Market Making Strategies
The most popular approaches include:
- Algorithmic trading – utilizing programs to place orders automatically, with no human involvement, increases efficiency.
- Arbitrage – reducing price differences in different markets and platforms (buying where the price is lower and selling on a platform where the price is higher).
- Hedging crypto market-making strategy – short-selling futures contracts to hedge against a possible price drop.
Final Word
A market maker in crypto plays a central role in building a stable trading environment with buyers and sellers on both sides of trades, facilitating narrowing spreads, reducing fees, and helping attract new market participants.