Who are the market makers of the crypto market? Why they are needed and how they earn
Who are cryptocurrency market makers, why are they needed and how do they make money?
Market makers play a key role in crypto exchanges, helping to provide liquidity for traders. We tell you about the principles of their work and sources of income
Market makers play a key role in maintaining liquidity in financial markets, making them attractive to traders. Their main task is to ensure substantial supply and demand for a particular asset, as well as to maintain a high level of trading activity. This guarantees fast execution of orders, which means favorable market conditions and risk reduction for market participants.
Market makers set supply and demand prices for trading pairs, and can also act as a buyer or a seller in a deal in the absence of a suitable counterparty.
Market makers are most often large financial institutions capable of providing the necessary trading volumes, but sometimes individual traders can also play this role. However, the requirements for them are very strict, and as a rule, only specialized companies offering market-making as a core service can meet them. To avoid conflicts of interest, it is important for crypto traders to make sure that an exchange and a market maker are two different entities.
Examples of major cryptocurrency market-maker companies include
Wintermute Trading is one of the largest market makers specializing in cryptocurrencies. The company is based in London and Singapore and makes trades between $2 billion and $3 billion per day, as of October-November 2023. During the peak of the crypto market in 2021, the company's daily turnover reached $7.5 billion. Wintermute's venture capital arm has backed more than 80 projects with investments since 2020.
London-based GSR is one of the oldest and largest market makers in the cryptocurrency market. The company was founded in 2013 by former Goldman Sachs traders. GSR has historically been active in trading a wide range of crypto assets but is focusing more on bitcoin (BTC) and Ethereum (ETH) as of the end of 2023. The company is also an active venture capital investor through its subsidiary GSR Investments, which is one of the top ten most active investors in the industry.
Chicago-based Jump Trading, which invests in traditional securities, spun off its Jump Crypto division in late 2015 to invest in digital assets. However, the company declined to trade cryptocurrencies in the U.S. due to the uncertain regulatory climate in the country. That said, Jump Trading has agreed with BlackRock, among others, to provide market-making services for a spot exchange-traded fund (ETF) for Bitcoin, if approved. Jump Crypto is also an active venture capital investor in crypto projects.
Other notable cryptocurrency market makers include Alphatheta, Bluesky Capital, Algoz, Acheron Trading, Auros, Kairon Labs, FalconX, Flow Traders, Portofino Technologies, and others.
Market makers provide liquidity in the cryptocurrency markets by guaranteeing sufficient liquidity in the order books. They act as intermediaries between the supply and demand for crypto assets, allowing traders to close their positions smoothly and in a short period of time.
Market makers give cryptocurrency exchanges certain advantages by playing an important role in improving the overall efficiency of trading on the exchange. By constantly providing bid and ask prices, they ensure a high level of liquidity in the order books (aka exchange stacks), which is necessary for smooth trading. By providing a high level of trading activity, market makers make the exchange an attractive platform for traders, thereby increasing its customer base and trading volume.
Market makers also contribute to the stability of cryptocurrency markets by ensuring price consistency. They help maintain a relatively narrow spread between buy and sell orders, which is a key indicator of high liquidity and an active trading environment on exchanges. This not only gives traders confidence but also protects them from potential market manipulation. In addition, by providing liquidity to assets that traditionally have low liquidity, market makers allow them to trade more actively, thereby increasing their market recognition and attractiveness to investors.
- How market makers make money
Basically, market makers earn income from the spread between the bid and ask price of assets. This spread is the difference between the bid price at which traders are willing to sell an asset and the slightly lower actual price, or market price. Conversely, traders willing to buy an asset set a bid price that is slightly higher than the market price.
The difference between the price that traders receive and the market price is the market maker's profit. In addition, market makers usually charge cryptocurrency exchanges a certain commission for their services, which serves as an additional source of income for them. The size of this commission can vary and is often determined by various factors, such as the exchange's policies or the volume of trading activity.
The so-called bid-ask spread, i.e. the bid-ask spread on exchange bids, is an important aspect of a market maker's revenue model. A wider spread increases a market maker's profit, but in markets with a large number of traders and market makers, there is usually strong competition, which leads to its narrowing. If the spread is too high, it may discourage traders and negatively affect the volume of transactions, which will lead to a decrease in the market maker's profit.
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