Before we delve further, let as first understand the importance of trading volume to the crypto ecosystem.
Trading is the very pulse of every crypto project existing today. After all, the very objective of crypto projects is to become a self-sustaining autonomous economic ecosystem. The term ‘ecosystem’ is originally a biological concept from which it was derived. Essentially, an ecosystem is defined as a symbiotic interrelationship of different participants in which every unit both contributes and benefits in the system. Energy is the driving force of every biological ecosystem which then circulates from one participant to another through the food chain. The same principle goes with a crypto-economic ecosystem, only this time, the driving force is value instead of energy. Value is then circulated through trading, and this is what keeps the existence of every crypto project. Therefore, in order for an ecosystem to thrive, a healthy circulation of values is necessary, and this won’t be possible without crypto-exchanges.
Want To Get Listed On An Exchange? Marketing, Advertisement, Community and Market Making Will Get You There
Whether Crypto Projects Understand It Or Not, Marketing, Community and Market Making Will Be Requirements For All Tokens Looking To Get Listed On Respectable Exchanges
If trading is the pulse, then exchange is the heart of crypto-economies. Sellers and buyers from various crypto-projects are connected through crypto exchanges. Coins and tokens are passed from sellers to buyers through these exchanges, with prices of the coins and tokens being determined by the corresponding demand and supply. All coins and tokens available for trading in exchanges have their bidding price (selling price) and asking price (buying price).
Key Concepts:
● Bid = price set by dealers that they are willing to buy a coin; always set lower than sell
● Ask = price set by dealers that they are willing to sell a coin; always set higher than bid
● Spread = the gap between the bid and the ask prices; the wider the spread, the more volatile the coin becomes
The common principle to this is that there is a gap between the bidding price and the asking price. Of course, dealers sell their coins with prices that are a little bit higher than the prices in which they buy. This difference of buy and sell prices is called the “bid-ask spread.” In this way, projects are able to gain revenue from the circulation of their coins. Traders gain, on the other hand, by trading under favorable conditions of the changing prices in exchanges such as “hodling,” or “buying low and selling high.” This relationship, alongside the usefulness of the coin as a utility ensures a stable, if not increasing, trading volume.
Trading Volume = Increase in Market Cap
Why am I emphasizing too much on trading volumes, you may ask? This is because the trading volume causes an increase in the market cap. Let’s take a look back in the bid-ask spread that I have mentioned earlier: for every coin being sold high and bought low in the side of the ICO, they gain more capital, and this increases the market cap. Furthermore, market cap divided by the number of coins in circulation is equal to the price of each coin. Therefore, an increasing or stable trading volume means an increase in the market cap which also means an increase in the price of each coin.
Key Concepts:
● Trading volume = amount of coins circulated for the past 24 hours
● Market cap = the total dollar market value of all of an ICO’s coins in circulation
● Coin price = price of individual coins; can be determined by Market Cap divided by number of coins in circulation
Liquidity is the problem for small and starting ICOs in maintaining a healthy trading volume
Let’s get this straight: a coin without trade is a dead coin. Trading volume is not a problem when it comes to the big-shots of the crypto-exchange such as Bitcoin (BTC) and Etherium (ETH). Their prices may fluctuate, but such are not game-changing problems given their high market caps and trading volumes. Small ICOs, on the other hand, are prone to volatility and fluctuations that may seem minor to the big players but may prove fatal for these starting ICOs.
The problem lies with liquidation. In the case of ICOs, when there is not enough counterparties that bid coins and ask for them, the bid-ask spread may be drastic, as selling prices become too high and the asking price, too low. When this happens, the coin or token becomes illiquid.
Key Concept:
● Liquidity = describes the degree to which an asset (the coin) can be quickly bought or sold in the market without affecting the asset’s price
Consider going to a fruits and vegetables market: of course, being a fruits and vegetables market, you expect the said products to be on the stalls, however as you start to buy, you discover that there are no fruits and vegetables available. The market in this analogy is the exchange platform, and the fruits and vegetables, the coin. Prices may still appear on the exchange, but since it has little to no sellers and buyers, it has no coins to offer because it has become illiquid.
When the coin has become illiquid, it becomes unavailable for trading, and just as I mentioned before, inability to trade is an ICO’s nail to the coffin.
This is where I will rejuvenate the dignity of Market Makers
There is a huge misconception as to how market makers work which gives them a very bad reputation especially in the stock exchange. Traditionally, market makers are seen as the villains in the stock exchange that manipulate the prices of the stocks that causes drastic price swings to traders, causing them to pull out and lose their investments. This may be true in some occasions, but just as I mentioned before, every participant plays a role in the economic ecosystem, and therefore everything serves a purpose.
In reality, market makers do not have the power to dictate the prices of the assets that a business has to offer. Instead, they are the ones that control the bid-ask spread in exchange for liquidation. What market makers do is that they provide services to projects by preventing assets to be illiquid, avoiding short-term volatility and allowing instant transactions for traders.
Here is why ICOs need market makers:
1. Market Makers provide liquidity
What market makers do is that they take the risk of the ICO by buying a huge amount of their coins. Market makers then are the ones that instantly provide traders with coins whenever they wish to exchange. In the case of an ICO with little to no buyers and sellers, trading of coins is impossible since it is illiquid. Imagine if you are the only one buying a certain coin, this means that your transaction will be the very determining factor of the demand and supply, meaning that the price of the coin will change drastically because of your one move. This means that the ICO you are transacting with is extremely volatile and risky. Market makers bring liquidity to these ICOs, since they elevate the demand by buying a large amount of coins, and sell it to traders. In other words, they make markets. They take the risk of the coin’s volatility by buying in bulk beforehand so that exchange would be possible to individual traders.
Sounds like it’s too charitable and noble to believe, isn’t it? But since this is an ecosystem, market makers have to benefit from this contribution, which brings me to the next point.
2. Market Makers match orders from ICO to ICO
So we now learn that market makers provide liquidity by accepting the risk of the ICO, now what? Market makers then minimize the risk by offering their services to other ICOs that demand the coins of the other. In this way, they are able to make sure that the coins they buy will be sold, and so they minimize the risk. Through this, ICOs are able to benefit further since their trading will be maximized through market maker’s matching of projects that have the corresponding supply and demand.
Nowadays, modern market makers are able to create matching algorithms that determine an ICOs ideal market, and so they extend their service to them by providing liquidity while at the same time matching them with other ICOs and individual traders.
3. Market Makers stabilize spreads and make fast transactions
Let’s take this example for the final case: say that the price of “Coin A” has dropped 20% in the crypto-exchange. Since you are a crypto trader, you find that this is an ideal time to buy the coin, and so you bought 200 ETH worth of “Coin A.” However, as you have placed your transaction on the exchange, due to a large amount of users trading and the amount of time it takes before your transaction is processed, your transaction has gone through during the time that the drop is now only at 10%. This means that you only got 200 ETH worth of “Coin A” at 10% drop instead of 20%, meaning you got less than you expected.
Here’s A Very Informative Video Of Market Maker’s Functions In The Financial Industry:
Advantages Provided By Market Makers:
Provision of Liquidity
With market makers, on the other hand, you are able to make a transaction at the very instant.This means that if you bought Coin A during a 20% drop, then you get what you transacted for at that very moment. This is because bidding prices and asking prices are stable with market makers. Why? Because they have bought it beforehand and now they’re selling it according to the prices that the dealers have set at the current time. In other words, they are not directly affected by the changes in the supply and demand happening in the ICO itself.
How do market makers benefit from this, you might ask again? Since market makers have a supply of coins, they also have bidding and asking prices for themselves, which is based on the starting prices of the coins for the day, and they earn from that bid-ask spread. To simplify, you can think of market makers as “retailers” of assets, in which they have bought wholesale and distribute it to traders more conveniently in exchange for a little profit. Furthermore, as a coin gains popularity and more traders, more market makers come into play which results to a competition. Market makers will compete to have a smaller bid-ask spread, giving traders more options to maximize their investments.
The requirements of a successful and trustworthy ICO: Marketing, Advertisement, Community and Market Making
Crypto-exchange platforms will do their best to provide their traders with the best ICOs, and so sooner or later, the most trusted crypto-exchange platforms will vet their listings according to the ICOs’ integrity and stability. ICOs on their end must be able to comply with these standards by assuring a healthy trading volume by means of an effective marketing and advertising campaign to spread their popularity, relevance and user-awareness. However, sheer fame will not suffice to guarantee a successful coin, as we have encountered countless failed ICOs and sometimes even frauds and scams deceiving public trust through grandiose marketing.
The requirements of a successful and trustworthy ICO: Marketing, Advertisement, Community and Market Making
Crypto-exchange platforms will do their best to provide their traders with the best ICOs, and so sooner or later, the most trusted crypto-exchange platforms will vet their listings according to the ICOs’ integrity and stability. ICOs on their end must be able to comply with these standards by assuring a healthy trading volume by means of an effective marketing and advertising campaign to spread their popularity, relevance and user-awareness. However, sheer fame will not suffice to guarantee a successful coin, as we have encountered countless failed ICOs and sometimes even frauds and scams deceiving public trust through grandiose marketing.
In addition to what was previously mentioned, ICOs must be able to present themselves as a marketable product, and what more can show marketability than presenting an established community and a promising trading volume. Practically speaking, established crypto-exchange platforms will not gamble their credibility by welcoming risky and volatile ICO neophytes, and so sooner or later there will be a need for small ICOs to have their own market makers in order to establish their reputation.
As we look toward the future, we may find crypto-exchanges a little more tolerable for new ICO listings, however with a certain set requirement to be met. And given the significant impact that market makers make on starting ICOs with liquidity and market availability, market makers will most likely be a requirement as crypto-exchanges’ insurance for being listed.
See? They’re not evil, after all. ;)