Market making in crypto: Mission and types

Market-making is a necessary process that helps to ensure that cryptocurrency markets have enough buyers and sellers to function efficiently. At its core, crypto market-making involves the continuous buying and selling of cryptocurrencies to ensure that traders and investors can execute their trades promptly and at stable prices. This article explains the role of market makers and their types.

How do market makers increase liquidity?

Market makers fulfill a crucial role by always being ready to buy or sell at quoted prices, thereby bridging the gap between supply and demand. This activity facilitates smoother transactions and contributes to reducing the volatility inherent in the crypto markets.

Crypto market makers increase liquidity by continuously placing buy and sell orders operating on a market maker platform like WhiteBIT. This constant flow of orders ensures that there are always available counterparties for trades on such exchanges. It makes it easier for other participants to execute their transactions quickly and closer to the market price. By reducing the spread between the buying and selling prices, market makers make trading more efficient and attractive, encouraging more trading activity.

Types of market makers in crypto

We may divide market makers into two types:

1. Profit-driven fund-like market makers include trading desks and hedge funds that engage in market-making or market-neutral trading activities. These entities aim to profit from the spread between buy and sell prices and capitalize on short-term market swings. They operate with a keen focus on risk management and often employ sophisticated trading algorithms to maintain profitability across various market conditions. Their operations are independent, relying on their capital and strategies to navigate the volatile crypto markets.
2. Market makers working with a token project or exchange, on the other hand, serve a slightly different purpose. These market makers are contracted to provide liquidity for a specific token or across an exchange’s trading pairs. Their primary goal is to ensure a smooth trading experience by minimizing the bid-ask spread and maintaining a consistent order book depth rather than directly seeking profit from trading activities. They enhance the asset’s or exchange’s attractiveness to traders by ensuring liquidity and reducing slippage. Compensation for these market makers usually comes from the hiring entity rather than the trading spread.

The key difference between these two types lies in their objectives and operational frameworks. Profit-driven fund-like market makers focus on generating returns through trading strategies. Market makers hired by token projects or exchanges aim to improve liquidity and trading conditions for specific tokens or platforms. They operate under a service-based model rather than purely profit-oriented motives.

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.