Market makers make it possible for investors to buy and sell digital assets by ensuring there is always somebody willing to take the opposite side of any trade. They are a crucial part of any financial market and, in crypto, they play a critical role in increasing the liquidity of tokens so that they can be traded more easily. However, their work is not without controversy and it is important that projects understand what they do before engaging with them.
Crypto market making for token projects
During the ICO phase, many new tokens are launched without sufficient community support and they can find it difficult to attract investors. This is because the market for a new project is often illiquid, leading to low trading volumes and potentially negative sentiment towards the token. However, with the right marketing strategy and assistance from a crypto market maker, a token can achieve a better liquidity and therefore become more attractive to traders.
A market maker’s role is to ensure that there is always someone on the other side of a trade, either by buying or selling their own tokens or by taking on risk from other market participants and matching them. To do this, they quote a bid and an ask price, the difference between which is known as the spread. A tight spread is preferred as it reflects a healthy market and allows for faster trades.
In addition to providing a level of liquidity, market makers can also manage order flow by buying or selling large amounts of a specific token at important price levels, in order to attract speculators and investors to the market. However, it is important to distinguish this from paying for order flow or using backdoors to an exchange to frontrun orders, which would be unethical and illegal.
Another benefit of a crypto market maker’s work is to enhance price discovery, or the process by which the market determines the fair value of an asset. This can be achieved through a variety of strategies, including arbitrage (buying an asset on one exchange at a lower price and then selling it on another at a higher price to align prices) and hedging (taking an opposing position in a different market to hedge against price drops).
There are numerous other benefits of crypto market making for token projects, but the most important is that it makes the token more attractive to traders and increases trading volume, which may lead to positive sentiment towards the project and its token. Having a well-functioning market maker is therefore essential for any new cryptocurrency project and should be considered as an investment in the long term future of a token.