What role does market maker play in the cryptocurrency industry and what are the benefits of market making?
Market makers help the financial market work more efficiently. They make the process of buying and selling seamless for investors and traders. Market-making practices are an integral part of the crypto market infrastructure. As long as we trade digital assets, the influence of market-making continues.
An efficient market maker creates a healthy market and helps in building the future of crypto projects while making huge profits from the bid-ask spread. Let’s understand what is market-making and its benefits in this article.
What is market-making?
The process of market making provides liquidity to both buyers and sellers of the crypto market. Liquidity is the ease of buying and selling a digital asset without significantly affecting the price.
The market becomes illiquid when the traders do not find counterparties to trade their cryptocurrencies. In this case, the market is prone to more slippage which causes price swings. To avoid these kinds of circumstances, market making is important. It is vital in the crypto industry more than in traditional markets.
How do market makers work?
For instance, if a buyer wants to buy $5,000 worth of any cryptocurrency, it might be difficult to find a seller with the exact supply. When there is a huge gap between what buyers are willing to pay (bid) and what sellers are willing to accept (ask), a liquidity crisis takes place. The price of a cryptocurrency becomes extremely volatile and the market does not operate smoothly.
Market makers help in avoiding these conditions by smoothing out the wide bid-ask spreads from the lack of traders’ activity. Market makers organize the distribution by volume and orders to ensure a healthy market condition. They facilitate buying and selling cryptocurrencies in large volumes and are more available to fill the orders.
Market makers & market takers
As the name imply, market makers “make the market”. They can be individuals or entities with a contractual obligation where their primary job is to create liquidity in the market. They ensure the order book's depth by offering to buy or sell at any given point in time. A market maker is committed to quote prices, order volume, and order frequency at the best bid and the best offer (BBO) prices.
On the other hand, market takers are not concerned with the BBO prices. They seek liquidity and look for a fair price to trade. Market takers are generally traders and investors. They do not have to be available all the time to buy or sell. Some market takers trade frequently but market makers are far more active because of the nature of their business.
Benefits of market-making in the crypto industry
One of the major benefits of market making is being able to make huge profits. Market makers profit from the bid-ask spreads. They charge higher selling prices (ask price) than the buying prices (bid price).
Let's use a scenario to understand how market makers gain profits. To provide liquidity, market makers buy and sell large volumes of cryptocurrencies. When they purchase 1,000 crypto coins for $100 each, they offer to sell those cryptocurrencies for $100.05 each.
Here, it's obvious that the bid-ask spread difference is only $0.05. However, by selling millions cryptocurrencies in a day, one would be making a significant profit in total.
Apart from providing liquidity, they help the market of a new crypto project or crypto exchange by making it more efficient by increasing adoption. And, they also make profits by collecting the bid-ask spreads multiple times. So, that is a win-win for all – market makers, traders, and the market itself.
When markets have low liquidity, traders find it difficult to get a good price. Without market makers, the bid-ask spreads become wider, increases the volatility of the asset. Market making plays an important role in influencing the overall growth of the market.
Who needs a market maker?
With all that said about market makers & takers, let's understand who would need and benefit in having market makers.
Crypto token projects - Several crypto token projects faced the challenge in lack of liquidity, low trading volume, low interest in the token project, and price manipulation. By integrating with a market maker, these projects can increase liquidity and trading volume, and create higher interest to increase adoption rate. Crypto token projects with a market maker have higher possibility in getting listed on a major crypto exchange.
Crypto exchanges - Crypto exchanges need market-making in order to get a high trading volume and lowers the chances of price manipulation. Higher liquidity helps them in increasing the customer base. At the same time, the revenue of the exchange increases by getting more interest from the traders.
Do you want to be a market maker (termed as liquidity peer) on XanPool?
XanPool users can opt to become Liquidity Peers (LP). Users who become liquidity peers in various markets help make the process of crypto onboarding and offboarding easier and more resilient. So, what's the benefit in upgrading to become a LP?
Convenience – All transactions are automated by XanPool's proprietary technology. LPs does not need to manage or monitor the account
Earnings – Earn a fee from every automated transaction
Custody – Take custody of their assets unlike traditional crypto markets
Fees – Some crypto trading platforms takes a market maker fee when you become one. It is currently free to sign up to be a XanPool LP.
Transparency – All automated transactions are made securely, compliantly and transparent to LPs
Crypto-lovers and enthusiasts will enjoy in being a LP. Beginners are encouraged to sign up and trade on XanPool before registering to be a LP. Join us today and create liquidity for cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), or Tether (USDT). Registrations are currently open in these countries – Hong Kong, India, Malaysia, Indonesia, the Philippines, Vietnam, Thailand, New Zealand, Australia, Korea.