The role of market makers in the crypto industry
Market makers, or market making services, have been around for a long time in the world of traditional finance. Naturally, when the crypto industry started to emerge, some of them were quick to join in, looking for new clients and opportunities.
However, although market makers have been around for a long time, they have only recently received the recognition they deserve.
After all, the importance of market makers is undeniable in the modern financial world. They bring structure and flow to trading activity, and their efforts are crucial in maintaining high liquidity for assets that are not as well known or popular as the top performers in the financial markets.
What are market makers and what do they do?
As mentioned, market makers are services that can be hired to provide liquidity and quote bid and ask prices for publicly traded assets. In doing so, they reveal at what prices they are willing to buy or sell, making price discovery and liquid trading easier.
Jens Willemen, co-founder and managing partner of a market making company called Kairon Laboratories spoke about it in a recent interview, trying to dispel any misconceptions.
He said: “Market making is about offering consistent prices on both sides of the order book to create liquidity. Market makers don’t trade directionally and therefore don’t care which way the market is heading. For a market maker, the profit comes from hedging the spread. Market manipulation is directional because it involves the price of an asset being manipulated up or down.
As such, market making can be a driving force for some altcoins, which do not benefit from Bitcoin’s reputation and popularity. This makes market makers crucial, although the barrier to entry into crypto markets is not as high as it is in traditional markets.
Holding the Market or Manipulating the Market: What’s the Difference?
As most people know, the crypto industry is still largely unregulated, which is one of its biggest problems at the time. The lack of regulation makes it riskier and less secure than it would otherwise be. Any service dealing with crypto is left to self-regulation and provides the best protection it can offer.
However, such inconsistencies prevent institutional investors from massively adopting the coins. At the same time, cryptos remain extremely volatile, which could result in different prices for each exchange, which would be terrible for the crypto industry as a whole.
With market makers listing their own buy and sell prices, prices are much more similar across exchanges, helping to foster a healthy crypto industry.
Of course, that doesn’t mean they are manipulating the market in the traditional sense. Market makers don’t care if the price goes up or down – they will move with the market. What concerns them is to maintain stability between the buy and sell prices and to use several different strategies to naturally increase liquidity.
Market manipulators, on the other hand, use pump-and-empty and similar plans to temporarily inflate the market just so they can turn a profit before prices collapse. It is not useful for the crypto industry – quite the opposite.
This is why it is important to differentiate the two and not to confuse them. Market makers bring several benefits including increasing market depth, controlling spreads, etc.
Market making is a very healthy practice that helps keep crypto and the traditional financial industries liquid and alive. While there are a lot of misconceptions about this, it is important to know that this is a legal and positive practice.
It is different from manipulating the market, and it doesn’t matter which way the price goes, as long as the movement is natural and healthy.
Posted on August 9, 2020