Crypto market making is a practice whereby big institutions act as buyers and sellers of a cryptocurrency or other asset. These investors do so to help keep financial markets liquid and generate profits. They are responsible for generating volume in an otherwise low-trading market and restoring filled orders when they come up for sale. It is important to note that this practice does not come without risk. Hence, one should not expect to profit from every trade.
Crypto exchanges that do not hire a market maker will be competing with hundreds of other exchanges for a growing user base. To attract traders, exchanges must offer competitive spreads. Adding market makers to an exchange’s platform also allows it to offer many types of tokens, a unique selling point. However, be careful when choosing a market maker. There are some who use illegal methods and you must be wary of them.
Automated market makers are becoming increasingly common on decentralized cryptocurrency exchanges. These sophisticated automated trading systems are composed of two different cryptocurrencies called liquidity pools. These pools enable anyone to become a market maker by providing liquidity to a pool of choice. They then earn a passive income on the deposits made by their clients. This type of trading system has multiple advantages, a primary one being reduced volatility and slippage. For institutional investors, market makers are critical to achieving their investment goals.
The role of market makers in the cryptocurrency space is essential. Without them, the market cannot grow and thrive. It is impossible to maintain a healthy market without proper liquidity. In addition, the market makers are responsible for keeping order books deep and tight spreads. Hence, a market maker without adequate liquidity can cause a cryptocurrency exchange to fail to thrive. A lack of liquidity can damage the reputation of a crypto exchange and hurt their relationship with its investors.
A large number of investors means a higher volume of trading. The demand generated by such volumes drives up the price and improves the overall liquidity. Additionally, a high trading volume makes it easier for market takers to trade in the asset. When volumes increase, more market makers will show up for free. With high volumes, an ICO project will have more leverage to negotiate a secondary listing. If its first listing is liquid, it may not be easy to convince investors to invest in it.
With the massive demand for cryptocurrency and digital assets, the number of market makers is relatively low. There are very few in this space relative to the number of digital assets. The demand for crypto traders is so high, that quantitative trading firms and hedge funds have flooded the sector. To attract the right people, the firms need a long-term track record of performance. Some are even offering a full-time position in the crypto sector. But this type of job is not for the faint of heart.
The risk of front-running is also a risk. This is because, as a market maker, you have to fill your sell and buy orders, and if you act on both sides, you end up increasing your inventory of the losing asset. Over time, your total inventory value will decrease. However, it is possible to minimize this risk by adopting a proper strategy. If you can find a broker who offers rebates to market makers tech deck ramps, it will pay off.