Traders aim to minimize bid-ask spreads, reduce transaction costs and foster increased market liquidity. Market makers are often hired by crypto exchanges to participate in their cryptocurrency market making program. In return, they often receive fee discounts and better trading conditions.
Market making plays a critical role in cryptocurrency trading. When we trade on a crypto exchange, there is always someone ready to facilitate our trades by providing constant buy and sell prices, ensuring liquidity and helping trades run smoothly. Who is? The answer is a negotiator. Let's see who they are and how they work.
Why Are Crypto Market Makers Important?
Market makers, whether financial entities or individuals, enhance liquidity in financial markets by being constantly ready to buy or sell assets. Their role ensures the continued presence of buyers and sellers, helping to shape prices and contributing to the overall efficiency of financial markets. Traders aim to minimize bid-ask spreads, reduce transaction costs and foster increased market liquidity for traders.
Market traders are often hired by crypto exchanges to participate in them crypto market maker. In return, they often receive fee discounts and better trading conditions.
Also, market makers work with new crypto projects that plan to launch their tokens and need to generate organic trading volume and build trust among investors. Traders help new tokens get approval for listing on trusted exchanges
How does Market Maker work and what are the types?
In the field of cryptocurrencies, cryptocurrency market makers operate similarly to their counterparts in traditional financial markets. They are consistently prepared to buy and sell cryptocurrencies, offering prices for the assets they trade. In particular, cryptocurrency market makers must operate 24/7 to meet the demands of continuous trading.
Traders may differ depending on the crypto generation strategy they use, but overall, all their types have the same goal – to provide liquidity and guarantee efficient price discovery. The most common types of market makers are:
Automated market maker (AMM) – operates on decentralized exchanges (DEX) and uses smart contracts to provide liquidity on these platforms. Unlike market makers in centralized exchanges, where trades take place on order books, in DEXs, asset prices are formed through a mathematical algorithm rather than by matching bid and ask prices.
OTC maker – companies that offer liquidity in the OTC market. Unlike stock exchanges, the OTC market operates in a decentralized manner, facilitating direct transactions between two parties.
HFT Maker – high frequency trading where traders use algorithms to conduct trades almost instantly on an extremely small time scale. Transactions are done in seconds. This allows for a large number of trades to be made per day and to profit from the bid-ask spread.
The role of cryptocurrency market makers is essential to the cryptocurrency trading ecosystem, providing liquidity, minimizing bid-ask spreads and encouraging efficient price formation.