Cryptocurrency trading is the process of buying and selling digital assets on a crypto exchange to make money on price differences. Liquidity plays a central role in this process. and refers to the ease with which an asset can be bought or sold. Market makers are crucial contributors to liquidity, as they actively participate in the market by continuously providing buy and sell orders. In this article, we will discuss market-making in crypto – essence, services, and strategies.
Crypto Market-Making Services
Market makers are financial companies or high-frequency traders that are active in the crypto market. They partner with a crypto exchange and enter into a market maker program, which implies they continuously add liquidity to the market. They do it by placing buy and sell orders on crypto assets, trying to reduce the difference between buy and sell prices (spread). High-liquidity markets have minimal buy/sell price differences and higher trading volume. Low-liquidity markets’ spreads are wide, so the difference between buying and selling prices is big, making it tough to trade efficiently, and therefore, reducing the trading volume.
By reducing bid-ask spreads, market makers facilitate a smooth flow of trades and increase liquidity, building an environment where traders execute transactions quickly and efficiently.
Crypto market-making services contribute to asset price stability and reduce its volatility. A liquid asset is less vulnerable to market manipulations and looks much more attractive to potential investors.
What is a Crypto Market-Making Strategy?
A crypto market-making strategy involves providing liquidity to a cryptocurrency market by placing a continuous stream of buy and sell orders. The goal is to profit from the bid-ask spread. Market makers use various algorithms and trading techniques to adjust their orders in response to market changes, ensuring they are always available to facilitate trades and maintain a stable market. Here are the most popular market-making strategies:
- Cross-exchange liquidity mirroring
- Market making without hedge
- Two-legged trading
- Delta neutral market making
- Grid trading.
Cross-exchange liquidity mirroring is one of the most common strategies. It allows market makers to profit from price differences between exchanges. By mirroring liquidity from one platform to another, they capitalize on price swings, buying low on one exchange and selling high on another. This strategy enhances market liquidity and boosts profitability. A market maker’s success relies on a deep understanding of market trends and knowledge of how to trade on different exchanges.
Market makers contribute to creating a robust and attractive trading environment, fostering active participation and engagement in the crypto market. Their continuous efforts ensure efficient trade execution and build a foundation for a healthy cryptocurrency ecosystem.