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Market Makers: Maintaining a Healthy Crypto Trading Environment

ByDave Stopher

Nov 17, 2023
Stock market display on monitor screen for analytic stock trade investor. Computer showing online stock exchange trading, data index and statistic with dynamic financial data graph. Trailblazing

Have you ever thought how easy you place and execute orders on trading platforms and have you ever wondered, who stands behind it? There is always somebody on the other side of a transaction, facilitating your trades at any given time and at any amount. Who is that and what motivates them to do that job? In this article, we will discuss the role of market making in cryptocurrency and how it ensures a healthy and smooth environment on trading platforms.

Who are the Market Makers in Cryptocurrency Markets?

A market maker’s role may be performed by:

  • individual high-frequency traders;
  • institutional investors and brokerage firms with large resources;
  • liquidity pools;

Talking about entities or individuals, it’s important to note that they must have sufficient resources to buy and sell digital assets throughout the day and facilitate a healthy trading environment for particular digital assets. Since market makers hold a certain trading volume of crypto assets, they face a risk of financial losses if the asset drops in price due to price volatility caused by market manipulations.

To hedge this risk, they are allowed to cut bid-ask spreads in buy or sell trades. Day by day, they simultaneously place buy and sell orders in order books, claiming their quotes. For instance, they may quote a bit price at $30 and an ask price of $30.20, which means they take a $0.20 cut per token if it is bought. That is the way market makers earn on cryptocurrency trading platforms. By providing liquidity and active participation in trading, market makers act both as buyers and sellers in the market, maintaining liquidity.

When we talk about financial entities, banks, companies, or individual market makers, we refer to a centralized and regulated cryptocurrency exchange. On DEXs, order books are replaced by liquidity pools that contain two digital assets. Anyone who adds liquidity to the pool becomes a market maker. They are also called liquidity providers (LPs) that pour funds into liquidity pools and earn their profits in proportion to injected liquidity. In non-custodial market making, LPs deposits are locked in smart contracts, which can be used by traders for token swaps.

Wrapping Up

Market makers, whether individual traders, institutional investors, or liquidity providers, play a crucial role in maintaining liquidity and stability in crypto markets. They profit from the bid-ask spread by continuously placing buy and sell orders, reducing price volatility, and ensuring smoother trading experiences. Their presence is essential in both centralized exchanges and DEXs, contributing to a more robust and efficient trading ecosystem.