Every market, be it financial, crypto, or real estate market, exists due to the demand and supply exposed to this or that asset or goods. A liquid market means there are buyers and sellers for an asset or goods. For example, a liquid house means there will always be someone willing to buy it. It works similarly with financial products and assets. 

When it comes to the market of digital assets (crypto), new trading platforms or recently released tokens often need help to maintain a sufficient level of liquidity. And that’s where cryptocurrency market making come to the scene. In this article, we will discuss what is market making in crypto and what are its main functions.

Market Makers in Crypto

Market makers are hedge funds, investment banks, or entities that pour sufficient funds into crypto trading (often millions and billions of dollars). A crypto exchange market maker is an entity or financial institution that partners with a crypto exchange and provides market-making services to it.

The essence is to constantly place buy and sell orders for specific traded pairs, and make a profit from bid-ask spreads. A crypto market maker strategy depends on trading volume and risk tolerance. That may be cross-exchange liquidity mirroring, delta-neutral market making, grid trading crypto market-making strategy, and others.

Market makers may also function in the decentralized landscape – on DEX platforms, traditional order books are replaced by liquidity pools. By providing liquidity to a pool, investors can become market makers (liquidity providers in the case of DEX).

Functions of Market Makers in Crypto

Here are the key functions of market makers:

  • Liquidity provision
  • Reducing bid-ask spreads – market makers narrow the gap between the highest bid (buy) and lowest ask (sell) prices. 
  • Stabilizing prices – market makers help stabilize cryptocurrency prices. They absorb excess buy or sell orders, preventing sudden and significant price fluctuations. 
  • Facilitating large trades – institutional cryptocurrency trading often implies sizable transactions. Market makers accommodate these large trades by providing the necessary liquidity.
  • Continuous quoting – market makers continuously update their buy and sell prices based on market conditions. 

Final Word

Market makers in crypto are key participants that enhance liquidity, stabilize prices, and foster efficient trading in the crypto market. Their continuous quoting and active participation contribute to a robust and dynamic ecosystem for digital asset trading. Without a doubt, market makers contribute to the crypto market maturity and growth of institutional trading.