Market Making in Cryptocurrency: How It Works And Who Can Join

Market making is an important function in financial markets, ensuring liquidity and smooth trading operations. Essentially, market makers facilitate buying and selling by quoting bid and ask prices, maintaining a liquid market. In the cryptocurrency sector, market-making plays a crucial role in providing liquidity on trading platforms. The principles remain similar in market-making in crypto space. How do crypto market makers work? Let’s find out more details in this article.

What is a Market Maker in Cryptocurrency?

A crypto exchange market maker is an entity that provides liquidity to the market by placing both buy and sell orders for a particular digital asset. The primary crypto market-making strategy is to profit from the spread, which is the difference between the buying (bid) and selling (ask) prices. By continuously quoting competitive prices and facilitating trading, market makers contribute to a more liquid market.

For example, let’s consider a market maker for Bitcoin. If the current market price of Bitcoin is $50,000 (ask) and $49,950 (bid), the market maker might place a buy order at $49,980 and a sell order at $50,020. If another trader places an order to buy Bitcoin, the market maker could sell at $50,000, making a profit of $20 (the spread). Conversely, if someone places a market order to sell Bitcoin, the market maker could buy at $49,980, again making a profit from the spread. This continuous quoting and trading activity by market makers increases market liquidity.

The Role of a Crypto Market Maker

The role of the market maker for crypto should not be underestimated. Here are their key benefits:

• Liquidity. Market makers contribute to market liquidity by placing both buy and sell orders, ensuring there are readily available options for traders to execute transactions.
• Order book maintenance. By continuously updating buy and sell prices, market makers help maintain an orderly order book, allowing for efficient price setting and reducing volatility.
• Market efficiency. The presence of market makers fosters a more efficient and responsive market, helping traders to execute transactions swiftly at fair prices.

Market makers are the key liquidity providers in the market. Large crypto exchanges, especially institutional-centered ones, hire market-making companies to maintain a decent level of liquidity on their trading platforms. By managing risk and executing other traders’ orders, market makers bring efficiency and stability to the cryptocurrency market.