Key Concepts of Crypto Market Making
Gotbit.io explores the world of crypto market making. The article provides answers to questions like, what is cryptocurrency marketing? Who are Market Makers in Crypto? What are the examples of crypto and bitcoin market makers?
What is Crypto Market Making?
This refers to a market activity where liquidity is added to a crypto asset through bids and buy limit orders on a cryptocurrency exchange. Profits are made from the difference in the bid-ask spread.
Who is a Market Maker in Crypto?
A crypto market maker is a person or firm that provides liquidity to a crypto asset by submitting both bid and sell limit orders on an exchange. Market makers often profit from the difference in the bid-ask spread. By providing liquidity, crypto market makers ensure that the market functions smoothly.
Market Makers in Crypto
Market makers in crypto can be profit-driven or designated. Profit-driven market makers provide liquidity using their own crypto assets. Designated crypto market makers, on the other hand, use the assets of their clients to provide liquidity.
Crypto projects that have not yet launched employ market makers to create liquidity for their tokens during their initial coin offerings (ICOs).
Market-making strategy in crypto
A good market-making strategy in crypto involves having a liquid order book and a tight bid-bid spread. This means that buyers and sellers will find the market fluid. It also facilitates reasonable prices and fast order completions.
How to be a market maker in crypto
Becoming a market maker in the crypto market involves these steps:
- Apply for the market making program provided by a cryptocurrency exchange
- Use the training and education materials provided by the exchange to learn the repetition of market making and the requirements of the exchange
- Get a market making software to automate the process
Often, crypto exchanges require market makers to have a minimum amount of capital. This is to ensure that market makers can always provide liquidity when necessary.
Market Making of Cryptocurrency
The job of a crypto market maker is to fill the void when a buy or sell order cannot be completed. For example, if a trader wants to buy a token worth $10,000, they need to find another trader willing to sell that amount at that time. If there is no such seller at that time, the market maker intervenes. This is how they reduce the time it takes to buy and sell crypto assets. However, if the order is beyond the capacity of one market maker, multiple market makers can fill the order.
As mentioned earlier, market makers profit from the bid-asp spread. Therefore, they must buy an asset lower than the current market price and sell it higher than the current market price. For example, say a market maker requires a spread of $0.4 for an asset valued at $5, this means the market maker will buy the asset at $4.8 and sell it at $5.2.
A table showing various bid-ask spreads and corresponding profits for 10,000 units of an asset traded at $10 per unit
| Spread between bid and ask ($) | Current Market Price ($) | Total unit of assets | Purchase price ($) | Sale price ($) | Total Profit ($) |
| 0.2 | 10.0 | 10,000 | 9.9 | 10.1 | 2000 |
| 0.4 | 10.0 | 10,000 | 9.8 | 10.2 | 4000 |
| 0.6 | 10.0 | 10,000 | 9.7 | 10.3 | 6000 |
| 0.8 | 10.0 | 10,000 | 9.6 | 10.4 | 8000 |
| 1.0 | 10.0 | 10,000 | 9.5 | 10.5 | 10,000 |
Market-Making Crypto Exchanges
Some of the popular crypto exchanges offer market making programs. These exchanges include Binance (specifically Binance US), Huobi, Coinbase, Kucoin, among others. It is important to note that these exchanges are not market makers themselves, they only provide a platform for market makers.
Conclusion
For markets with minimal liquidity, one could argue that crypto market makers are the backbone of such markets. This is because every crypto trader wants to trade in a highly liquid market; a market where trades are executed quickly. And without market makers this may be impossible.
