🪙 Market Making in Crypto: What is It and How Does It Work?

In the cryptocurrency trading sector, market makers are important players that facilitate liquidity and stability for crypto exchanges. Today, we will talk about the role of the cryptocurrency market-making for crypto exchanges and explain how it works.

What is a Market Maker in Crypto?

A crypto market maker is a high-frequency trader, financial entity, fund, or specialized company that cooperates with a crypto exchange and participates in its market-making platform. The idea is to influx large volumes of liquidity by consistently placing buy and sell orders, contributing to price stability, minimizing spreads, and creating an efficient trading environment on a crypto exchange.

In the world of centralized exchanges like WhiteBIT or Binance, not every crypto market maker gets approval. The focus here is on reputation, compliance, and following regulatory standards, making sure only trustworthy entities contribute to trading on these platforms.

Integrating a crypto address AML check into the process of crypto market-making adds an extra layer of security and compliance for crypto exchanges. AML verification involves conducting due diligence on the activities associated with market makers’ crypto addresses to ensure compliance with regulations.

Crypto market-making services for exchanges include:

  • Liquidity provision – boosting the availability of digital coins for smooth buying and selling.
  • Price stability – stabilizing prices by minimizing bid-ask spreads and reducing volatility.
  • Efficient trading – facilitating quick and competitive order execution for traders.
  • Risk management – implementing strategies and technology to manage and reduce risks effectively.

How Does Crypto Market Making Work?

Crypto market makers generate profits by charging a spread between the buy and sell prices. In simpler terms, they propose to buy a crypto asset for slightly less than its current price and aim to sell it for a bit more than the prevailing market rate. Market makers pocket the spread from each trade, making money on buy-sell price differences.

Consider an example with SOL that costs $100. If a crypto market maker sets a spread of $0.50, they might propose to sell you $100 worth of SOL at $100.50. On the flip side, if you were to sell SOL tokens to a market maker, they might offer to buy them at $99.50. This gap between the buying and selling prices constitutes the market maker’s profit.

Market makers can earn significant profits by making a large number of trades each day and capitalizing on the spreads between buying and selling prices. Frequent trading activity allows them to use these price differences and accumulate earnings over time.

Last Updated on January 19, 2024