Market making is not a new concept in financial markets; these crucial participants play a key role in fostering a healthy trading environment, and the crypto market is no exception. Today, we will focus on crypto market makers, see what they are, and how they make a profit.
What is a Crypto Market Maker?
A crypto market maker is an individual or entity that engages in financial markets by consistently initiating both buy and sell prices for a digital asset, with the intention of profiting from the bid-ask spread. Market makers play a crucial role in boosting liquidity, creating a seamless trading process, and contributing to market efficiency.
Who is a liquidity provider? It is a broader term that includes entities like market makers and other participants such as institutional investors or algorithmic trading firms. Market makers are a specific subset of liquidity providers actively involved in continuous quoting and trading on a market maker trading platform. Liquidity providers, in general, contribute to liquidity through various means, such as providing substantial order sizes or participating in specific trading programs.
How Does a Crypto Market Maker Make Money?
The main goal of a market maker is to add liquidity to traded assets. To do that, they place orders to buy or sell a digital asset in an order book on a crypto exchange. They specify buy and sell prices, maintaining them as close as possible, to ensure there is not a big difference. This difference is called spread, and the shorter it is, the easier other traders find each other and conduct their deals at a fair price.
So here is how a market maker earns:
- Spread. By buying assets at a lower rate and selling them at a higher price, market makers pocket the spread. For instance, a market maker buys SOL at $87.64 and sells it at $88, taking the difference of 0.36. Yes, that’s a tiny profit, however, having concluded a large number of transactions a day, a market maker accumulates profit.
- Arbitrage. Crypto rates on different exchanges may vary, so market makers use this opportunity to buy low on one platform and sell high on another one. In such a way, they also contribute to the alignment of prices on different exchanges.
- Fees. On some platforms, market makers charge small fees from traders. Some exchanges also charge lower fees from makers.
Cooperating with market makers, crypto exchanges maintain their liquidity level at a decent level. High-liquidity markets, in turn, become magnets for new users and investors, creating a healthy ecosystem for the broader crypto community.