It took around ten years for cryptocurrency to go from a narrow retail trading niche to institutional adoption. Starting in 2021, digital assets such as Bitcoin and Ethereum became the center of attention of financial and tech companies, who poured billions into these assets. With the growth of crypto institutional trading, the need for highly liquid trading platforms has grown. So in this article, we will discuss the essence of market-making in crypto and list some of its services and strategies.
The Importance of Market Making in Cryptocurrency
Crypto investors and traders use trading platforms for buying and selling digital assets, swapping them, and converting them to traditional financial assets. If an asset is easily bought and sold at a fair price, that means it is a liquid asset. That is, there are a sufficient number of buyers and sellers for it.
If there are no buyers or sellers (counterparties), trading is slowed down, and the price becomes more volatile. To maintain liquidity at the needed level, crypto exchanges hire companies or high-frequency traders that will continuously place buy and sell prices for assets. By doing this, they ensure their readiness to fulfill trading orders that other traders open. In other words, they make a market.
A cryptocurrency market maker’s profit comes from bid-ask spread – the difference between the buy and sell prices.
Market maker services include:
- Liquidity provision 24/7
- Narrowing bid-ask spreads
- Ensuring a steady volume of tokens
- Maintain price stability.
Often, market makers use software like Antier, GSR, Winterminute, or Jump Trading for more efficient trading. These solutions provide market markets with multistrategy support, easily configurable API, automated trading 24/7, and other useful features.
Market Maker Strategy
Market-making requires professionalism and an in-depth understanding of the crypto industry and strategies in trading. A strategy stands as a market-making algorithm, used by a trader to provide liquidity for other traders and participants. Here are the most popular strategies in crypto market making:
- Two-legged trading
- Delta neutral market making
- Grid trading
- Market making without hedge
- Cross-exchange liquidity mirroring.
The two-legged trading strategy is one of the most popular. The idea is to buy and sell assets simultaneously and fulfill the market orders. The strategy implies placing two opposite limit orders for a digital asset – a buy order below the market rate and a sell order above it. When both these orders are fulfilled, a cryptocurrency market maker makes a profit from the difference in buy and sell price (spread).
Final Thoughts
Crypto market makers are the crucial players in the market. Their services help maintain liquidity, constrain high volatility, and enable other market participants to trade with ease.
