- August 7, 2024
- Category: Blockchain
Cryptocurrency market makers are essential for active traders as they ensure enough liquidity in the market and that orders are quickly processed. By offering their services, market makers can profit from the price difference between each trade.
Cryptocurrencies are constantly evolving, and the market is becoming more similar to traditional stocks, commodities, and foreign exchange markets. A market maker in crypto can be an individual or institution that places bid and ask limit orders for a specific digital asset, which helps maintain liquidity and the smooth operation of the crypto markets.
To become a market maker, read about the necessary steps.
- Profit-driven Crypto market makers: these individuals or institutions carry out their operations by using their cryptocurrency as capital.
- Designated Crypto market makers: Some institutions or individuals utilize their customers’ cryptocurrency as capital for trading.
How to Become a Crypto Market Maker?
Understanding crypto market making is just the first step if you want to become a crypto market maker. There are a few essential steps to follow, and they are listed below:
- Apply for a crypto exchange platform’s market making program.
- Trade frequently to provide liquidity.
- Opt-in for training and education offered by the exchange to meet the requirements to become a market maker.
- Partner with a crypto market maker such as Yellow Capital or purchase market-making software that automates the process.
Many exchanges require maintaining a minimum net capital to become a market maker. While some exchanges require their market makers to hold up to $250,000, the amount may vary depending on the exchange or project.
Cryptocurrency projects in their Initial Coin Offering (ICO) stages that are yet to go mainstream now employ the services of professional crypto market makers to create liquidity for their tokens.
How Does Crypto Market Making Work?
When you want to buy a cryptocurrency like XYZ for a specific amount, say $1,000, you must find someone willing to sell it for that price. However, you’ll likely find a seller at a different time than you want. This is where crypto market makers come in. They act as intermediaries between buyers and sellers, filling the gap and making transactions faster.
When the amount of cryptocurrency you want to buy or sell is too large for a single market maker to handle, the exchange allows multiple market makers to quote their prices on the order. Crypto market makers profit by charging a spread, the difference between the bid and offer price. They buy a cryptocurrency for less than the current price and sell it for more, and the difference is their profit.
For example, a market maker charges a spread of $0.08 on XYZ. If you want to buy $1,000 worth of XYZ, the market maker will offer to sell it to you for $1,000.4. On the other hand, if you want to sell XYZ tokens to the market maker, they will offer to buy them from you for $999.6. This price difference is how market makers make their profits.
Tools They Use
- Trading Bots
Automated trading bots become the most important in high-speed trading. They show the arbitrage opportunities, rebalance the bid-ask spread in real-time, and hedge the risk. Automated bots can be customized and then follow certain strategies developed by the market maker. - API Integration Tools
Application Programming Interfaces (API) are tools that enable market makers to easily connect their trading systems with multiple exchanges. APIs will also allow the automation of collecting data, executing trades, and managing portfolios. - Risk Management Tools
Market makers have to be conscious of risk in high-frequency traded and volatile assets. This tool helps monitor exposure, set stop-loss, and hedge positions.
Popular Tools:
Risk Navigator: Helps market makers visualize and manage risk exposure.
Delta Exchange: Allows hedging strategies with futures and options trading. - Analytics and On-Chain Data Tools
Many market makers also rely on analytics platforms for insight into market trends, trading volumes, and data from blockchains in general.
Popular Analytics Tools:
Glassnode: on-chain data analytics like wallet activity or exchange flows.
CryptoQuant: Focuses on blockchain metrics and exchange data to predict market trends. - Analysis Tools for Order Book
Analysis of order books is important for market makers as it helps them to understand the sentiment of the market and the depth of trading. These tools visualize buy and sell orders to show opportunities and risks.
Popular Tools:
Bookmap: real-time order book heatmaps for visualization of liquidity.
Exchange-native Depth Charts: The majority of the exchanges offer native depth charts, the majority of them including Binance and Coinbase Pro.
TensorCharts: Advanced charting and order flow analysis for crypto markets. - Backtesting and Simulation Tools
Before a market-making strategy can be deployed, backtesting tools give an estimation of performance using historical data. Simulation tools facilitate practicing in the real world without putting actual capital at risk.
Popular backtesting tools:
TradingView – Backtest your strategies against historical charts.
QuantConnect is an open-source, browser-based backtesting platform for algorithmic trading.
CryptoTester – Tests crypto trading strategies against historical data. - Sentiment Analysis Tools
Most crypto market makers make predictions based on market sentiment. The tools that are created for this analyze news, social media, and discussions within communities.
Popular Sentiment Tools:
LunarCrush: Supplies social engagement, sentiment tracking, and influencer activity across numerous cryptocurrencies.
Santiment – Combining sentiment data with on-chain analytics. TIE: A platform designed to offer real-time sentiment and analytics to crypto traders. - Security And Compliance Tools
Given the associated risks in the crypto market, market makers should be given tools to protect themselves while remaining compliant.
Key Tools:
Chainalysis: Blockchain analysis and AML.
Elliptic: Provides crypto-transaction monitoring and compliance solutions. Fireblocks: Secure Digital Asset Transfer and Management Technology.
What are Crypto Market Making Services?
Crypto market makers provide essential services in the cryptocurrency ecosystem, including:
- Automated cryptocurrency trading: With market makers, crypto investors can start automated trading on exchanges to provide liquidity to the market and ensure stable pricing. This is because market makers are always available to buy or sell any crypto, regardless of the volume, reducing the wait time for investors to find someone willing to buy/sell the amount they have to sell/buy.
- Hotlink Orders: Crypto market makers ensure that you can stream more liquidity for your digital asset exchange from any third-party exchanges like Binance, Coinbase, Huobi, Bitfinex, or any other liquidity provider of your choice through configurable API endpoints.
- Providing Consistent Spread: Market makers enable tighter spreads and incentivize trading among retail traders, making trading more accessible and affordable.
- Aggregate Order Books: Market makers combine the bid-ask orders on an exchange platform with the crypto available at a specific price from third-party liquidity providers. This results in a more efficient market and better pricing for investors.
Additional Services
Exchange Listings Support
Pre-Listing Strategy
Crypto market makers help projects develop pre-launch strategies before the tokens go live on exchanges. This includes advising on the right listing venues, initial liquidity requirements, and trading strategies to create a successful launch.
Post-Listing Support
Market makers continue to provide liquidity, manage order book volatility, and keep order books active after a listing of a token. A good trading volume is thus supported, and confidence in higher market performance of the token arises.
OTC trading – Over-the-Counter trading
For investors looking to make large trades without moving the market, market makers provide OTC services. This is very important for institutional investors and whales who wish to buy or sell large amounts of crypto.
Strategic Advisory Services
Tokenomics Design
The market makers will also help the project shape effective tokenomic models, considering supply distribution aspects, inflation rates, and staking mechanisms, among others, toward sustainable growth.
Market Strategy Development
They help develop a trading strategy, a launch plan, and ongoing market operations to maximize the success of a token in the crypto market.
Marketing and Community Support
Market makers often collaborate with projects to amplify visibility via marketing campaigns and community engagement. This drives up the trading volume and attracts new investors.
Treasury Building
Crypto market makers help projects create and manage sustainable treasuries by ensuring proper asset allocation, liquidity, and risk management. They provide strategies to diversify the holding instance, stablecoins, BTC, and ETH-yield generation through staking and DeFi protocols and implement token buyback programs that will support the token value. Market makers also provide various risk mitigation solutions, including hedging and stop-loss mechanisms, to ensure treasury stability during market volatility. It is a service that will help the project stay healthy in financial terms and attract investors’ confidence to invest in its long-term growth.
Summarizing Crypto Market Making
Market making is a beneficial practice that helps stabilize both cryptocurrency and traditional markets. Crypto market making is the most reliable way to regulate the cryptocurrency market. Crypto market makers provide liquidity, allowing them to make a healthy profit. If you’re considering becoming a market maker yourself, there are a few steps you’ll have to take when working with exchanges. However, plenty of documentation and on-site assistance are available to help guide you through the process.