Market Making

Market Making: What Does This Term Mean in Cryptosphere?

At the time the Internet was born, it helped some of the most significant investment opportunities open up to the world. Post-Internet, blockchain has changed the entire history of the investment. After all, it is the very technology powering cryptocurrency and the future of money and markets.

However, digital currencies are notorious for being high-risk owing to their unpredictable price fluctuations. Today, if many traders are investing in crypto-assets with high confidence, it is because of the Market Makers.

A Brief Overview of Market Making

In the crypto world, Market Making is actively buying from one investor and then selling to the other for providing market liquidity. That’s because market makers make the market by facilitating the order flow. This is what keeps the market for a specific digital asset, like BTC, productive.

Takers v/s Makers

To understand it better, here’s one example –

John wants to get 1 BTC, and he wants to exchange his 10 ETH for it. What if no one is willing to do an exchange with John?

It is a good thing that Jane agrees to a swap with John at the market rate of 9.9 ETH to 1 BTC. But, Jane doesn’t stop there. After buying from John, Jane, in turn, finds a seller.

To do this, she sells the ETH for BTC on her exchange account for a slightly higher market rate, at 1.01 BTC. So for this swap, she still earns 0.01 BTC in profit. Here, John is a market taker.

Jane is a risk taker but more than that, a market maker.

The Ethical Goal of the Market Makers

Market Making isn’t all about manipulation. It is something that entails adjusting the price of digital assets for balancing the supply and demand of digital currencies in the market. Again, the higher purpose is not to manipulate the market but to enable both buyers and sellers to achieve their individual goals of investment or sales immediately and keep the transactions flowing.

This results in lowering the trading costs and inviting more and more investors. And, more volume implies to more liquidity.

Market Makers Can Take Risks: Why?

The major market makers can do this by having a diversified portfolio of cryptocurrencies as well as maintaining a spread on each.

Moreover, for calculating the risk, tools have become indispensable such as automated bots running trading algorithms for offering different trades at competitive prices, in addition to the skilled humans overseeing the day’s trading.

This way, the most trusted market makers require to have a powerful investment in technology, a solid code of ethics and manpower.