Before you go, check out these stories!

Hackernoon logoHow Do Market Makers Enhance the Liquidity in Crypto Exchanges? by@robert-kroos

How Do Market Makers Enhance the Liquidity in Crypto Exchanges?

Author profile picture

@robert-kroosRobert Kroos

Crypto Writer with 4+ years of Expertise!

Cryptocurrency exchanges with high-end liquidity are playing a great role in the crypto industry. To enhance liquidity, Market Makers are responsible for the buy, sell and execution of orders. This article discusses the importance of Market Makers and its process of multiplying the liquidity in the crypto trading platforms.

What is a Market Maker in Crypto?

Market Maker is the process through which a trader seamlessly provides liquidity for both the buyers and sellers in the financial market. Indeed, they extend the limit orders in the order book of the exchange platform. They make the market by quoting the price of prices to both the buyers and sellers for the digital asset.

The reason why Liquidity is so important is since they imply the ability to buy and sell the crypto-assets instantly. Thus, liquidity has an important phase similar to product development and marketing. 

Market Makers must operate under a given exchange’s laws which are approved by the country’s regulations and SEC in the US markets. 

By holding a large number of given assets or securities, a market maker is able to bring in a high volume of orders in seconds. If investors are selling, these liquidity providers are required to keep buying and vice versa.

Importance of Market Makers in Crypto Industry:

Market Makers are widely adopted across well-known exchanges around the world. Moreover, these entities ensure that digital assets are sold at a fair price which is beneficial for both parties. 

Market Makers enable the crypto markets to become more efficient since they reduce price volatility and bring in a fair price in the industry. Consider any virtual asset. The difference between the bid and the asking price is referred to as the bid-ask spread.

For instance, consider if the exchange and the market lack liquidity. With this, the exchange could experience a wide bid-ask spread. This wide size will be directly proportional to the trading volume, resulting in a tighter volume to be traded.

These Crypto Market Makers make money with the bid-ask rate for every asset. The bid price is the maximum amount that anyone is interested to pay for an asset. While the asking price is the minimum amount that anyone is interested in selling for an asset. 

Most buyers are willing to pay less than sellers are willing to sell for. Thus, the bid price of the asset will always be lower than the asking price. Depending on the spread, the market makers make money. 

In addition to the bid-ask price, yet another factor determining the asset’s liquidity is the order book depth. With this, the number of assets can be purchased at a given price level. This liquidity in the crypto exchange software platform is hugely dependent on the crypto market makers. 

Due to the decentralization feature, the crypto assets price may vary across various bitcoin trading platforms. Hence, without crypto market makers, the cost of cryptocurrencies will differ from their market price.

Here are the major reasons why Liquidity providers are important:

  • Market Makers enrich the market figures

The cryptocurrency industry is with fluctuations in price. But these Market Makers are responsible to uprise the trading volume and reduces the volatility of prices in the crypto industry.

To do this, the number of tradable assets are increased in the trading pair. This process creates a constant flow between the supply and demand factors. Hence, the trading platforms which integrate market makers can attract more traders.

  • Market Makers perform a broad range of services

These Market Makers do a great set of services. If you consider the industry forums, the deals are found to be irrelevant. On the other hand, these liquidity providers go with the current market price in the industry and perform the orders with minimal delays. 

  • Market Makers Stabilize the Spread

The major aim of Market Makers is to keep a low spread and at a fixed rate. They bear the risk and fix the prices for the traders which helps them to achieve the spread rate. This helps the retail traders to save their costs while executing trades.

How Market Makers can resolve Liquidity problems in the IEO market?

The problem here is, the issuers feel difficult to list their tokens on exchanges. The reason is that most of the exchanges charge a great amount of fee to list the tokens. It can even go upto 7-digit cost which can be too costly. 

Similarly, crypto exchanges need to take a separate set of rules to examine the tokens in the industry. This means that exchanges risk themselves while listing the tokens. Thus, there are not sure of the liquidity. It would be a great loss for trading platforms if the desired tokens aren’t traded on the exchanges. 

In this case, Market Makers are needed in the crypto industry. In the IEO market, by making use of a market maker, the problems are completely resolved. With Market Makers, exchanges don’t have a problem in listing the tokens. If the exchange finds that the project consists of a Market Maker, it will charge a small fee for listing.

High liquidity gets the attention of a huge set of investors. The lower is the spread on the token, the higher will be the liquidity in it. If the asset has higher liquidity in the market, it becomes more worth.  Thus, the market makers help the issuers to list the tokens and also attract a great set of investors to get them.

To Close:

To put it all together, Market Makers develop a well-structured cryptocurrency environment. In this decentralized market, an external institution keeping price, volume, and spread safely to be a fair option to satisfy the customers and also exchanges. 


The Noonification banner

Subscribe to get your daily round-up of top tech stories!