Market makers are collectively perhaps the most important, but least visible, pillars of the cryptocurrency ecosystem. These are the players that offer liquidity, allowing traders to enter and exit positions seamlessly and instantly. Get rid of them, and liquidity in the crypto market would evaporate in minutes. Without these market makers, volatility would increase by as much as 3750%. Even the most experienced traders would baulk. Today, nearly any new crypto project you come across employs market makers to help make sure their token has liquidity and can be actively traded.
Market makers are critical in providing liquidity in crypto markets. They facilitate the effortless trading of new cryptos and their services are leveraged by almost every emerging cryptocurrency project. To provide liquidity, market makers typically go through an agnostic process.
How Market Makers Provide Liquidity
Market makers do indeed have a model of making liquidity available. They generally follow a specific process. The main goal of market makers is to continuously provide two prices to the order book: a bid price and an ask price.
For example, a bid price would be the highest price that a stock market maker is willing to pay for a share of stock. The ask price is the highest price at which a market maker is willing to purchase an asset. The difference between the bid price and the ask price is the spread. Market makers are making money on the spread because they are buying at the bid price and selling at the ask price.
Market makers always quote firm bids and asks. This approach ensures that there are never buyers or sellers in the market. By always making it possible to buy or sell, this ‘order book’ prevents any dramatic swings in prices. It ensures that traders can get in and out of their orders quickly and with minimal slippage.
The Impact of Market Makers on Price Stability
Market makers are an important part of the cryptocurrency ecosystem to create long-term price stability. Without them, the market would be much more chaotic. This is due to the fact there would be less liquidity, fewer buyers and sellers, present at any moment. This lack of active market participants would result in violent price swings.
Imagine that a huge institutional sell order suddenly drops on the market. With no market makers willing to take on the excessive selling pressure, pandemonium breaks out. The price would crash in a race to the bottom as sellers all race to find a buyer first. Conversely, if a large buy order enters the market without market makers, the price would skyrocket as buyers compete to find sellers.
Market makers play an important role in reducing these wild price fluctuations by injecting a little more distance between the buyer and seller. They are constant market makers, always ready to buy an asset and sell it at the same time—even when there is a huge imbalance in demand. This ongoing willingness to exchange at a given price serves to keep prices calm and avoids extreme volatility.
The Role of Market Makers in New Cryptocurrency Projects
There is not a single new cryptocurrency project that wouldn’t hire market makers. That’s due in large part to the fact that new projects are notoriously difficult to initially attract liquidity, especially at the beginning. If left alone, traders have a hard time buying and selling the token when liquidity is low. Failure to meet this challenge can tremendously limit the project’s long-term potential.
Market makers are invaluable partners for new projects looking to address this challenge by providing crucial liquidity at launch. They make certain that one can almost always find a willing buyer and seller for the token. This boost in liquidity helps make the token a more appealing market to investors and traders. By creating a consistent price for the token, it raises trust in the project. This stability is key for leveraging additional follow on support and interest.
Market makers are essential to the long-term success of promising new crypto projects. By absorbing volatility and providing liquidity, they allow these projects to find their market fit and build communities around them. Without the influence of market makers, most new cryptocurrency projects would probably never find their footing.
