Crypto Market Making: Who and How Provides Liquidity to Crypto Markets - The Redditch Standard

Crypto Market Making: Who and How Provides Liquidity to Crypto Markets

Redditch Editorial 28th Feb, 2024   0

Liquidity is crucial in cryptocurrency, enabling easy and quick transactions without significant price movements. Liquid tokens allow for smoother trades and minimal price slippage. Illiquid tokens are easy to manipulate because there are a few market participants.

Liquidity provision in cryptocurrency is an essential stage of token development and promotion. To keep newly launched tokens tradeable and attractive to investors, it is important to boost their organic trading volume and liquidity. For that purpose, crypto projects cooperate with market makers.

Who is a Market Maker?

Market makers play an essential role in the crypto ecosystem by providing liquidity, facilitating efficient market operations, and price stability in crypto. It makes them indispensable for a healthy financial market.

Market makers are usually financial entities, organizations, or specialized companies cooperating with crypto trading platforms. They continuously initiate buy and sell orders on specific assets and are ready to fulfill any orders that emerge on a crypto exchange. In return for their activity, makers receive rebates, low or even zero trading fees, as well as advanced tools, flexible APIs, etc. An example may be the WhiteBIT market-making platform, which offers makers lower fee rates for spot trading -0.010%, for futures -0.010%.

Market Making Strategies

One of the advantages of market makers is that they make a profit based on the difference between supply and demand. A market maker’s profit comes from the spread (the buy/sell price differences). The goal is to make the spread as narrow as possible because narrow spreads facilitate trading. If the difference between buy and sell prices is big, it will deter other traders. So, a market maker’s task is to make the spread short while fulfilling large trading orders and accumulating spreads.

Here are common strategies for makers:

  • Automatic cryptocurrency trading – automated trading systems help traders maintain optimal prices while profiting from the spread.
  • High-frequency trading – conducting many transactions in a short period of time using specialized software.

Wrapping up, market makers provide liquidity to the crypto markets, which is crucial for efficient trading operations and price stability. They use various strategies, such as automated trading and high-frequency trading, to maintain optimal prices and narrow spreads. By doing so, they facilitate trading and generate profits for themselves and the exchanges they work with. Market makers are an integral part of the crypto ecosystem, and their role will likely continue to grow as the market expands.

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