Market Making in Crypto: Types and Differences

Liquidity is crucial in the cryptocurrency market as it ensures that traders can buy or sell assets anytime. Without adequate liquidity, the market becomes volatile and vulnerable to manipulation. High asset liquidity helps stabilize prices and create a favorable trading environment at fair prices that will attract investors. Market Making in Crypto

Institutional trading crypto on WhiteBIT or other large platforms with hundreds or thousands of institutional clients is possible due to high liquidity levels. Large exchanges cooperate with market makers to ensure stable high liquidity to their trading platforms. This article explains the types of market makers in crypto.

What is a Market Maker in Crypto?

A market maker is an individual or a specialized company or entity that supplies liquidity to a specific crypto asset. Their work principle varies depending on their types. Generally, their task is to place buy and sell orders on a crypto exchange and be ready to fulfill any new orders that arise. In such a way, market makers ensure there are always counterparties for any trade and in any amount.

A market maker’s profit comes from a spread (buy/sell price difference). The goal is to make the spread as tight as possible along with conducting hundreds of trades per day. The high volume of trades, even with a small profit margin from each spread, can lead to significant overall profits for the market maker due to the scale of their operations.

Types of Crypto Market Makers

Here is how we can divide market makers:

  • Traditional crypto market maker. Such market makers operate similarly to the stock market, using their capital to trade crypto and make money from buy and sell price differences. They hold an inventory of a particular asset to be always ready to buy or sell and maintain liquidity. This approach is used by high-frequency traders who tend to fulfill hundreds of trades per day, boosting liquidity and earning from bis/ask spread. WhiteBIT crypto exchange market making is based on the traditional approach.
  • Automated. Automated market makers (AMMs) work with decentralized exchanges. There are no order books (like in centralized exchanges). Instead, they use smart contracts, where prices are determined by math formulas.
  • OTC. Such market makers provide liquidity “over the counter.” Trades take place directly between two parties and don’t have any impact on the asset’s price.

Crypto market making plays a key role in the efficiency of a crypto trading platform. They ensure that there is always a counterparty for any new trade in the market. Market makers help combat price volatility and make assets resistant to manipulations.

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