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The importance of market makers in cryptocurrency has grown rapidly as the industry continues to mature and expand. Market makers play a vital role in maintaining the liquidity and stability of individual crypto tokens, but even as their influence grows, their overall purpose remains widely misunderstood.
There’s a mistaken conception that market makers are utilized to guide price discovery and in some cases, even to manipulate the value of some crypto assets. But the reality is far more prosaic. As a rule, market makers are entirely neutral, as they have no interest in the price movements of the assets they provide liquidity for.
What market makers actually do is to provide buy- and sell-side liquidity in order to match orders on both centralized and decentralized cryptocurrency exchanges. They make money from fees earned on the bid-ask spread, which is the difference between the closest buy and sell prices, meaning they have no need to protect asset price pegs, create a pricing floor or move asset prices upwards.
Exchanges and projects alike partner with market makers simply to reduce the spread in highly liquid markets in order to benefit both retail and institutional traders. They play an important role by helping to absorb the regular and sudden fluctuations in supply and demand. They help to stabilize asset prices and create a more predictable trading environment that benefits every participant.
Traditional Market Makers
The first market makers emerged in the early days of the stock market. They were associated with the first stock exchanges, and would facilitate securities trading by standing by to buy or sell them whenever required.
As electronic trading evolved, so did the role of market makers. These days, market makers operate 24/7, always ready to provide liquidity to fulfill trades whenever there is demand. They are essential to modern financial markets, as they ensure there is always a buyer or seller at the ready for any given security. In this way, they ensure that the financial markets can function smoothly at any time.
The market makers in traditional financial markets use complex algorithms to determine the prices at which they’re able to buy and sell securities, and often use their own capital to ensure their markets have sufficient liquidity.
In the crypto industry, market makers fulfill a similar role, but instead of swapping securities they enable the trade of digital assets. Just as with traditional finance, numerous specialized crypto market makers have sprung up to offer their services. Crypto market makers work with some of the biggest crypto exchanges around. However, some CEX platforms, such as Binance, have created their own market makers.
Market Making Strategies
In crypto, most market makers will employ a variety of strategies to provide liquidity for a certain asset. This includes using algorithmic trading strategies and providing their own capital to complete buy and sell orders, similar to market makers in traditional markets.
Generally, most market makers rely on advanced algorithms to optimize their operations. These algorithms are tasked with constantly analyzing market data, identifying trading opportunities and utilizing complex trading techniques to ensure sufficient liquidity is always available, and to respond to sudden price movements effectively. To do this, they must have a detailed understanding of the markets and their patterns, including factors such as pending orders, the volume of orders and the level where stop-losses and take-profits are established.
To give a quick example, let’s imagine that the price of ETH is rising steadily. The market maker may identify there is a high concentration of stop-loss orders for around $2,500, together with limited buyer interest at that price. The market maker can take advantage of this situation by entering the market with a substantial buying volume at between $2,400 and $2,490 in order to absorb any counter offers. Using this strategy, it can push the price above $2,500, triggering the high volume of stop-loss orders made by other traders. This will result in a surge in the price of ETH to $2,600, at which point the market maker can exit the trade.
Who Are The Leading Market Makers In Crypto?
For many crypto projects, it’s important to maintain healthy liquidity for their native tokens to reduce volatility and ensure traders can get a fair price. Without a market maker to balance things out, the spread can widen considerably. For traders, this indicates low volume in an asset, which reduces its appeal. Hence, it has become common from projects to turn to market makers to engineer high liquidity and maintain a tight spread.
A number of market makers have emerged in crypto today. One of the most notable is Kairon Labs, which provides market-making services as well as exchange listings and advisory services. It supports hundreds of digital assets and utility tokens across multiple leading CEX and DEX platforms. Notable collaborations include the Elastos blockchain ecosystem, the yield farming protocol Harvest Finance and the blockchain gaming launchpad Seedify.
Kairon is led by a team of algorithmic trading experts and financial analysts, who are highly skilled in maintaining balanced liquidity, and it also boasts a network of partners including venture capital firms, exchanges and launchpad that it works with to ensure additional support for projects.
Another important market maker in crypto is Auros, which specializes in partnering with early-stage crypto projects. By providing new projects with sufficient liquidity, it plays a critical role in driving growth within their ecosystems.
Auros differentiates itself from other market making services with a rewards approach that’s based on key performance indicators, giving projects more confidence in its ability to deliver results. It is contractually obligated to deliver on its KPIs in order to generate profits from its services, and has proven to be a reliable partner for crypto projects including Radix, Clearpool and Qredo.
Wintermute combines its algorithmic trading approach with its OTC trading platform NODE in both spot and derivatives markets. NODE caters to professional investors, who can partner with Wintermute to provide capital and ensure sufficient liquidity is available for the tokens it backs.
Like Auros, Wintermute is mostly focused on early-stage projects as they first enter the crypt markets. It supports more than 200 digital assets, partnering with brokers, funds, family offices, blockchain projects and other organizations.
The Backbone Of Crypto Markets
Crypto market makers perform a key function in digital asset trading. They actively create the conditions required to facilitate the smooth trade of crypto tokens without any delay or significant price movements. Moreover, they are essential to facilitate the entry of new assets to trading markets, providing sufficient liquidity to survive at a time when trading volumes and demand are extremely volatile and highly unpredictable.
Without the services of a market maker, even the biggest and most widely traded cryptocurrencies would succumb to incredible price volatility.