Who is a Market Maker in Cryptocurrency?
In traditional currency markets, stability is generally maintained by the participants themselves and regulatory bodies. In the decentralized market, without a central governing authority, the responsibility for monitoring supply and demand levels falls solely on the participants.
To avoid intimidating new traders and to attract potential users to decentralized markets, specific individuals are designated for these tasks. These individuals are known as market makers.
Who Are Market Makers?
Market makers are market participants who trade according to specific, pre-agreed rules. They can only conduct transactions with assets within certain price and volume ranges. This ensures the necessary level of demand for the stable continuation of the crypto market.
Market makers perform crucial functions, such as:
- Keeping quotes within a specific range
- Preventing price gaps
- Providing liquidity
- Maintaining trading volumes on exchanges
The primary goal of a market maker is to create a “live market,” increasing user activity. By following pre-determined actions, they skillfully direct investor funds where the market needs them most, helping to avoid crises.
The largest market makers today include investment firms like Citi, Barclays, Bank of America, Goldman Sachs, JP Morgan, and Morgan Stanley. Previously, Alameda Research was on this list, but it lost its significance after the FTX scandal.
Why Is a Market Maker Needed in the Cryptocurrency Market?
When a new cryptocurrency is launched, its price can change a lot, and demand can be unstable. This happens because:
- Investors behave unpredictably
- Early investors might want to sell quickly
- There isn’t enough of the cryptocurrency available for smooth trading
These issues can cause trading volumes to drop and create a big difference between buying and selling prices. Without control, the cryptocurrency market can become chaotic, potentially leading to the asset’s crash.
To prevent this chaos, platforms or issuers bring in market makers. Market makers can be individuals or specialized companies like banks or brokers. They use their expertise and large amounts of money to keep the market stable and efficient.
Example
Imagine a new cryptocurrency called “CryptoCoin” is launched. At first, everyone is excited and starts buying and selling it. But soon, some investors panic and try to sell all their CryptoCoin, causing the price to drop rapidly.
At the same time, other investors want to buy CryptoCoin but can’t find enough sellers at a fair price. This creates a big gap between the prices people are willing to buy and sell at, making the market very unstable.
A market maker steps in to help. They buy CryptoCoin from those who want to sell and sell to those who want to buy, at prices that are close together. By doing this, they ensure there’s always enough CryptoCoin available for trading, and the price doesn’t swing wildly. This keeps the market stable and allows CryptoCoin to grow steadily without crashing.
Market Maker responsibilities
Market makers are like the unsung heroes of the trading world, making sure everything runs smoothly. Here’s a peek into their world:
- Creating asset liquidity
Think of liquidity like a party where you can always find someone to dance with. High liquidity means you can quickly exchange an asset for cash or another asset without a hassle. Market makers are like the party planners who ensure there’s always enough dance partners around. Without them, the party (or market) could come to a screeching halt with wild price swings. They make sure traders can always find someone to trade with, keeping the market fun and stable.
- Mediating large transactions
Imagine a sumo wrestler (crypto whale) trying to tiptoe through a china shop. One wrong move, and things could get messy. Big financial operations can bring in quick profits but also risk smashing the market’s balance, especially if the asset is not very liquid. Market makers are like the skilled guides who help the sumo wrestler navigate the shop without causing chaos. They handle big transactions behind the scenes, making sure these heavyweights don’t crash the market party.
- Preventing sharp price swings
Demand can be as fickle as a cat deciding whether to knock over a glass. One moment it’s calm, the next it’s pure chaos. Market makers are the diligent cat whisperers, keeping an eye on every twitch and flick of the tail (demand and volume changes). They step in to smooth things out, ensuring the market doesn’t have drastic drops or surges, keeping everything purring along nicely.
Conclusion
Market makers play a vital role in the cryptocurrency market, providing the necessary stability and liquidity that keeps the market functional and attractive to traders. By ensuring there is always someone to buy and sell assets at reasonable prices, they prevent sharp price fluctuations and help maintain smooth trading operations.
The activity of market makers in cryptocurrency markets is considered by some researchers to be almost foundational. Due to their work, many trading platforms have not only stabilized after the launch of a new currency but also sustained stability during the high demand periods of early stages. Thanks to them, platforms can avoid the chaos that comes with sudden changes in demand and supply, allowing new cryptocurrencies to find their footing and grow.
Market makers have a significant impact on the crypto asset market and the DeFi sector. In 2021, the active involvement of market makers led to increased interest in stablecoins. Market makers are the primary liquidity providers, making them essential to every trading platform.
Whether they are large investment firms or specialized companies, market makers use their expertise and resources to create a more predictable and efficient market environment. This not only helps in sustaining the market but also boosts confidence among traders and investors, contributing to the overall growth and stability of the cryptocurrency ecosystem.
The easiest way to buy, sell or exchange coins is to use SimpleSwap services.
You might also like our articles “Comparing the Current Crypto Bull Run to Historical Trends” and “Exploring Play2Earn in 2024”.
SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.
