Market making in crypto is a liquidity support service offered by market makers who place large volumes of both buy and sell orders to provide liquidity in exchanges for easy and instant trading of cryptocurrencies.
Liquidity is the ease and speed with which you can buy or sell small or large amounts of crypto without significantly affecting the price. High liquidity means trades are executed quickly and efficiently.
Crypto exchanges and projects, especially projects about to list their tokens, partner with market makers who facilitate liquidity in crypto markets, ensuring smooth transactions, less price slippage, and stabilizing volatility.
This article examines crypto market makers, their work, and how they profit from offering these services.
What are Crypto Market Makers?
Crypto market makers are firms or individuals that trade both sides of the market, usually by placing bid and ask orders for the same crypto trading pairs.
Market makers have existed for a long time. They operate in traditional equities markets, where they provide liquidity and depth to the market.
In Tradfi, market makers are usually brokerage firms or financial institutions such as big banks.
Source: b2bbrokers
Without crypto market makers, buyers and sellers may struggle to find counterparties at exact price points, leading to a lack of order book depth.
This results in wide bid-ask spreads—the gap between the highest buy price and the lowest sell price—making trading inefficient. All of these may lead to low market activity for token pairs or on some exchanges, leading to reduced trading volumes and further exacerbating liquidity issues.
Source: keyrock
How Do They Work?
Crypto market makers continuously fill up the order books of exchanges with their two-sided quotes to meet investors’ demand and supply.
They profit from the difference between their buy price(bid) and sell price (ask); this is known as bid-ask spread.
Source: Emperica
For example, a market maker might quote a $99 ask price (the price they sell at) and a $101 bid price (the price they buy at), creating a $2 spread, which represents their profit.
Although the bid-ask spread may seem small, market makers generate significant earnings through high trading volumes.
Beyond spread-based profits, exchanges often offer additional incentives to market makers, such as lower trading fees or rebates. Likewise, crypto projects frequently partner with market makers to enhance liquidity, ensuring smoother trading and a more stable market for their tokens.
Multiple crypto market makers can operate on the same exchange, creating a highly competitive environment that drives the bid-ask spread as low as possible.
As each market maker competes to have their orders filled first, this increased competition benefits traders by improving liquidity, reducing trading costs, and ensuring more efficient price discovery.
The Role They Play: Importance of Market Making in Crypto
Market markers create a stable environment that benefits exchanges, traders, token projects, and institutional investors. Here are some of the ways they contribute:
Liquidity Provision
Market makers ensure there are always buyers and sellers by continuously quoting bid and ask prices. This reduces bid-ask spreads, making trading faster and more efficient.
Price Discovery
By dynamically adjusting buy and sell orders based on market conditions, market makers help establish fair and transparent token prices, especially in less liquid markets.
Reduced Price Volatility
Market makers stabilize prices by maintaining sufficient order depth, preventing sharp fluctuations caused by large trades or low market activity.
Lower Transaction Costs
Tighter bid-ask spreads mean traders face minimal slippage and lower transaction costs, making crypto trading more cost-effective.
Increased Trading Activity
By ensuring smooth trade execution, market makers attract more traders to exchanges, boosting trading volume and enhancing market efficiency.
Support for New Token Projects
New and smaller token projects benefit from market makers, who provide initial liquidity, improve visibility, and create a more active trading environment.
Institutional Trade Execution
High-volume investors, or whales looking to buy or sell large amounts of a cryptocurrency, rely on market makers to execute large transactions without significantly impacting prices, allowing for better risk management and market predictability.
Frequently Asked Questions
Are Crypto Market Makers Regulated?
Regulation varies by jurisdiction. While some countries and regions have clear guidelines on crypto market-making activities, reputable exchanges also enforce strict policies that market makers must comply with.
How Does Market Making Work on Decentralized Exchanges (DEXs)?
DEXs use automated market makers (AMMs) instead of order books. Market makers provide liquidity by depositing token pairs into liquidity pools, earning trading fees.
Some DEXs, like dYdX and Serum, use on-chain order books, allowing market makers to place and adjust limit orders dynamically.
Is Crypto Market Making Profitable?
Profitability depends on factors like trading volume, bid-ask spreads, market volatility, and incentives from exchanges or token projects. Firms use advanced algorithms and hedging strategies to optimize profits while managing risks like impermanent loss on DEXs.
When Do Crypto Projects Need Market Makers?
Projects need market makers before or during token listings to ensure liquidity, prevent extreme volatility, and make trading more attractive.
Market makers help establish a stable order book, tighter spreads, and consistent price discovery, making the token more appealing to investors.
Who Are the Top 5 Crypto Market Makers?
Some of the leading crypto market makers include:
- Wintermute
- Cumberland
- GSR
- Empirica
- Kairon Labs
Closing Thoughts
The adoption of cryptocurrencies over the past 20 years has been nothing short of remarkable. This relatively obscure asset class has made it to ETFs and the portfolio of institutional investors.
As more people embrace crypto and new tokens are listed on exchanges daily, the services of market makers become essential for ensuring smooth, efficient, and seamless buying and selling of these assets whenever investors trade.
[Author’s Note: This article does not represent financial advice, everything written here is strictly for educational and informational purposes. Please do your own research before investing.] Author: Godwin Okhaifo[Author’s Note: This article does not represent financial advice, everything written here is strictly for educational and informational purposes. Please do your own research before investing.]
Author: Godwin Okhaifo
Also Read: Introduction to Liquidity Pools
