Crypto Market Making: 101

Crypto Marketing Making: 101

What is Cryptocurrency Market Making?

Everyone hears that they need a market maker to have success on cryptocurrency exchanges. In fact, some exchanges even require it these days. Many ICOs seek market making services as a way to increase their volume and get listed on better exchanges. Both early-stage projects and established currencies find themselves looking for a designated market maker (DMM) without actually understanding what they do and why they are so instrumental in market success.

It is important to have a solid understanding of a service before making an important financial decision, like hiring a market maker. In traditional equities markets, small and medium-sized companies employ designated market makers to ensure that their company shares are liquid. Cryptocurrency DMMs do the same thing, except they are employed by cryptocurrencies and work on crypto exchanges.

Crypto market makers operate in a similar fashion to designated market makers who work with stock exchanges.  In this article, we’re going to talk about the basics of cryptocurrency designated market making to understand why it is so necessary for both new and established cryptocurrencies.

What is a Market Maker?

Market makers, also known as liquidity providers, work to promote a healthy and active market for buyers and sellers on stock exchanges.  Liquidity means how quickly or easily goods and assets can be bought and sold without significantly affecting the price— it creates a well-connected, fair, and stable financial market in a space where a natural buyer and seller may not exist.

They can operate on a singular exchange or across multiple exchanges. Market makers add liquidity to assets so they can easily be bought or sold on exchanges. Designated market makers in the crypto space do the same thing, Their primary function is to make sure the market is always liquid. This essentially means that there are always coins available for purchase when buyers come to the market.

How do Market Makers Make Money?

There are two different types of market makers. Non-designated market makers and designated market makers. So what’s the difference and how do they make money?

  • Market makers (not designated) simply make money off of the spread—or price difference—when they buy and sell, whether it be in equities, cryptocurrencies, or any other asset. They tend to operate with liquid, high volume assets, such as large-cap equities—high volume and low volatility markets.

  • Designated market makers are sponsored to provide liquid markets. They tend to work for smaller companies or cryptocurrencies and work with smaller volumes.

What do Crypto DMM’s Actually Do?

They promote activity on markets by placing many orders across cryptocurrency exchanges for their designated currencies. They use advanced software to increase an assets availability power, making sure it is available to buy and sell efficiently—24 hours a day, 7 days a week

Market makers “reduce the spread”—meaning they reduce the price gap between buyers and sellers. People will be discouraged to buy if there is a 20% gap between the buying and selling price. Market makers show other buyers and sellers where to set their prices and encourage them to add liquidity of their own.

A good market maker doesn’t want to “be the market”, they don’t pump and dump or create the illusion of market activity. They promote a healthy market, and if the market is healthy, that is where people will invest.

Why Sponsor DMMs?

Why do companies and cryptocurrencies sponsor designated market makers?

Essentially, because the long-term price of the asset goes up more. Research has shown that companies that employ DMMs on equity exchanges see, on average, a 3.5% increase in their asset each year. Essentially, DMM’s are specialists that help navigate and enhance the wide world of electronic trading—offering best prices, encouraging market activity, reducing risk and volatility, and increasing value for their partners.

There are both direct and indirect benefits that come from hiring a DMM to provide liquidity. The direct objectives are to reduce the spread, add size to the market, and make the market highly available. An increase in market activity and the worth of an asset are indirect outcomes of working with a designated market maker. A particular benefit we see for cryptocurrencies is an increased chance of getting listed on better exchanges.

Who Needs a Market Maker?

All assets benefit from market making. Especially less liquid ones, like small-mid-sized companies and early stage cryptos. In a nutshell, there are buyers all over the world who want to invest in crypto projects, and designated market makers help them do so by keeping market activity flowing and stable. Many ICO projects get started without a solid understanding of how to be successful on an exchange. Without market activity, ICO projects won’t make it. Market activity creates volume, and people see volume as a sign of financial success. This will lead to more volume and more prominence. More and more coins are using market makers to bootstrap their way up to better exchanges and diversify their investor base.