In the increasingly volatile and complex cryptocurrency trading landscape, market makers play a central role in ensuring liquidity and smooth trading on crypto exchanges. High-liquid trading platforms attract institutional investors with the opportunity to swiftly and efficiently execute large trading orders. In addition, new projects strive to list their tokens on high-liquidity exchanges to get exposure to a wide range of active traders and investors (e.g., WhiteBIT listing services).
Institutional exchanges do their best to incentivize companies that provide liquidity. They do it through low fees and rebates, premium features, colocations, and VIP support. This article explains the world of crypto market making, its strategies, and risks.
What is a Crypto Market Maker?
A crypto exchange market maker is a company that provides liquidity to the market by buying and selling crypto assets at quoted bid and ask prices. They play a crucial role in ensuring the market operates smoothly and efficiently. Examples of market makes in crypto are Autowhale, GSR Markets, Kairon Labs, and Bluesky Capital.
The main objective of traders is to establish a liquid market that permits them to enter and exit positions rapidly without causing significant price changes. This process involves constantly adjusting buy and sell prices to maintain balance in the market.
Crypto Market Maker Strategies
Here are some of the common strategies for market makers:
- Arbitrage trading
- Statistical arbitrage
- Market pegging
- Delta hedging
- Order book imbalance.
The main strategy employed by crypto market makers is centered around maintaining a bid-ask spread. It allows them to profit from the difference between the buy and sell prices. Market makers continuously adjust their bid and ask prices based on market conditions, supply and demand dynamics, and other factors influencing the price of crypto.
Risks Faced by Crypto Market Makers
One of the main challenges faced by market makers is competition. As more participants enter the market and engage in market-making activities, the competition for liquidity increases. Market makers need to constantly adapt and refine their strategies to stay ahead of the competition and maintain profitability.
Market makers also face the risk of adverse price movements. If the market moves in an unfavourable direction to their positions, market makers may incur losses. To reduce this risk, market makers employ risk management techniques such as setting stop-loss orders and monitoring market conditions.
Market makers must comply with relevant laws and regulations to avoid legal issues as the cryptocurrency market becomes more regulated.
Overall, crypto market making is a complex process that involves creating and maintaining liquidity in cryptocurrency trading markets.
