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Understanding the Purpose of Market Making in Crypto

Liquidity is a cornerstone of the crypto market, ensuring that assets can be bought or sold rapidly without causing significant price swings. Crypto exchanges cooperate with market makers to increase liquidity and attract more users. Crypto market-making services are also used by new crypto projects that plan to list their tokens on a crypto exchange. Listing on WhiteBIT and other prominent institutional platforms is more achievable for a token that boasts organic trading volume and is supported by a reputable market maker.

What is a Market Maker in Crypto?

Market makers are companies or specialized entities that partner with centralized crypto exchanges to provide liquidity to their trading platforms (such as the WhiteBIT market maker platform). Such exchanges offer trading platforms that rely on order books. A market maker’s task is to continuously place buy and sell orders for crypto assets, standing ready to fulfill the orders coming from other traders. In such a way, market makers create a two-sided market where buyers and sellers easily conduct transactions at a fair price. 

To form a fair price, market makers rely on demand and supply, adjusting their balance. For that purpose, they do their best to make the buy and sell price difference (spread) as small as possible. Maker’s profit comes from the spread. By conducting hundreds or thousands of trades per day, they collect spread from each transaction. Tight spreads indicate favorable market trading conditions and attract more traders. Thus, the trading volume is growing, bringing more income to a market maker.

The Goal of Crypto Market-Making Strategy

Market makers’s purpose lies in the following:

  • Tight spreads. The primary goal of crypto market-making is to provide buy and sell orders with a narrow spread, which is especially crucial for illiquid assets.
  • Risk management. Integrating risk management in market-making strategies to protect capital from schemes like pump-and-dumps is crucial. This approach also allows market makers to profit from arbitrage before others, ensuring consistent pricing across exchanges and pairs.
  • Volume. High trading volume results from crypto market making, signaling investor interest and potential price growth. However, it is prohibited to create artificial volume through wash trading (trading with oneself to inflate volume) as it doesn’t truly enhance market liquidity. The fundamental goal of market makers is to supply organic liquidity. 

A market making strategy in crypto is focused on increasing liquidity and narrow bid-ask spreads. Market makers facilitate trading and reduce price volatility by providing a continuous stream of buy and sell orders. However, it’s important to note that market-making can be risky, especially in the highly volatile and unpredictable crypto market.

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