Importance of Market Making in Crypto - The Solihull Observer

Importance of Market Making in Crypto

Solihull Editorial 28th Feb, 2024   0

Market makers are essential participants in the cryptocurrency market. They create demand for crypto assets, help form fair prices, boost trading volume, and, therefore, create a favorable trading environment for other traders and investors.

Many large crypto exchanges offer market-making programs. To cooperate with the WhiteBIT market maker services or other large platforms, entities that apply to become market makers undergo thorough checks for compliance and reliability. It is done to ensure that a market maker adheres to regulations and can supply enough liquidity to institutional-grade exchanges.

Liquidity in Cryptocurrency

Liquidity is the lifeblood of the crypto market. Tokens with high liquidity have enough buyers and sellers, so there are always some movements in the market. High liquidity helps maintain a fair price for the tokens and ensures they are easy to buy and sell at any time with no price slippage.

Low liquidity tokens are difficult to sell as there is insufficient demand for them. They are also prone to manipulation, and their buy and sell prices can vary significantly.

New market tokens require help driving their trading volumes, creating natural demand, and forming a fair price. This is why new projects usually cooperate with market makers before applying to listing on crypto exchanges.

Market Making Strategies

In general, a market maker’s strategy is to continuously place buy and sell orders for a specific asset in the order book. The difference between the buy and sell prices is called “spread,” and this spread is a market maker’s profit. The goal is to make the spread as small as possible to make buy and sell prices closer. It creates a fair trading environment and attracts more traders. A market maker pockets the spread from every order fulfilled.

Market-making strategies include:

● Grid trading

● Delta neutral

● Two-legged trading

● Cross-exchange liquidity mirroring

● Market making without hedge.

Why Crypto Market Making is So Important

Market makers play an essential role in making crypto markets attractive for trading. They help maintain a high liquidity level, thus, trades are fulfilled quickly and at a fair price. Liquidity provision is crucial in minimizing the spread between buy and sell orders, which in turn reduces trading costs for all market participants.

By ensuring that orders can be executed promptly without significant price slippage, market makers contribute to a more stable and efficient market environment. Their activities encourage broader participation by reducing the barriers to entry for retail and institutional

investors. It enhances the overall market depth and resilience against volatile price movements. In doing so, market makers facilitate smoother transactions and bolster confidence in the crypto market.

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