Who is a Cryptocurrency Market Maker?

In traditional markets, market makers act as middlemen between asset buyers and sellers. Their role is to provide liquidity to the markets and reduce the difference between buying and selling prices. Makers continuously initiate new buy/sell orders in the order book on a trading exchange. They “make the market”, always standing ready to buy and sell assets and fulfill arising orders from other traders. They make money from buy/sell price differences, which is called “spread”. The same works with crypto market making. Let’s discuss what is market making in crypto in more detail.

Who is a Market Maker for Crypto?

Talking about financial entities or high-frequency traders on a centralized market-making platform, to engage in market-making, they need to pass due diligence and prove they are able to provide sufficient trading volumes. The essence is the same as in traditional market making. A company or entity specializing in market-making, places bid/ask prices on an exchange’s order book and fulfills the new orders in it. Their role is especially important in the crypto market, known to be volatile.

Market makers play a central role in helping new crypto projects grow their tokens trading volume, attract investors, create trust, and after all, contribute to successful listing on reputable exchanges.

Risks of Market Making in Crypto

Engaging in market-making in the crypto space entails various risks. One significant risk is price volatility on a market-maker crypto exchange, where sudden and unpredictable price movements can lead to financial losses.

Liquidity risk is another concern, as market makers may struggle to execute trades in illiquid markets or during periods of increased volatility. Operational risks, such as technological or connectivity issues, can also impact market-making activities.

What is a Crypto Market-Making Strategy?

Since the market is dynamic and the market makers’ task is to fulfill the arising orders, they need to implement efficient risk management strategies despite the market conditions. Here are some popular strategies in market making:

• Delta neutral market making
• High-frequency market making
• Grid trading.

A maker’s income is formed from the spread and volume. However, holding an asset exposes them to price movements in the opposite direction. To hedge this risk, they adopt a delta-neutral crypto market maker strategy by placing offsetting orders on different exchanges. Placing opposite orders on exchange A and exchange B, market makers reduce the risk of losing funds on one exchange by making a profit on another one. As a result, a trader gets a zero-sum on asset price movements while still earning from the spread.

Market-making requires a clear understanding of strategies and the ability for quick decision-making.