Lack of Market Makers in Crypto trading assets further contributes to the destabilization. From my perspective, I get constant notifications from Coinbase that tell me the last N hours had a price difference of +/- NN%. Typically 5% plus or minus. To me, these are erratic swings in prices make it very hard to predict from a short or long term perspective what the trajectory is for these cryptocurrencies. In the equities markets, there is a concept of “Market Maker” that exists to help limit the price variation, i.e. volatility. Below is a brief explanation of the Market Maker, and one capital management firm that claims they are a market maker for cryptocurrencies.
What Is a Market Maker
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the bid–ask spread, or turn. The function of a market maker is to help limit price variation (volatility) by setting a limited trading price range for the assets being traded.
In U.S. markets, the U.S. Securities and Exchange Commission defines a “market maker” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price. A Designated Primary Market Maker (DPM) is a specialized market maker approved by an exchange to guarantee that they will take a position in a particular assigned security, option, or option index.
KEY TAKEAWAYS
- A market maker is an individual participant or member firm of an exchange that buys and sells securities for its own account.
- Market makers provide the market with liquidity and depth while profiting from the difference in the bid-ask spread.
- Brokerage houses are the most common types of market makers, providing purchase and sale solutions for investors.
- Market makers are compensated for the risk of holding assets because a security’s value may decline between its purchase and sale to another buyer.
- While brokers compete against one another, specialists post bids and asks and ensure they are reported accurately.
Market Maker – Bluesky Capital Management
Liquidity problem for Token Projects
Many token companies raised a substantial amount of capital during the past 2 years. Unfortunately, many of them faced the following challenges:
Lack of liquidity: investors and project founders could not monetize their investment due to a lack of liquidity in their token
Low trading volume: traders and investors are not incentivized to trade the token because of high transaction costs due to market impact
Price manipulation: low liquidity makes it easier for bad actors to manipulate the price of a token
Low interest in the token project: difficulty in liquidating positions makes investors less likely to invest in a token project after launch
Difficulty listing on major crypto exchanges: lack of market makers and committed liquidity in a token makes it more difficult to list on major crypto exchanges, giving less visibility and interest in a token project
Market Making Program for Token Projects
By adopting a market maker who provides liquidity on pre-agreed terms, token companies can potentially expect the following benefits:
- Higher liquidity: by having enough liquidity available in the token, investors and founders can invest or liquidate their positions more easily
- Higher trading volume: higher liquidity potentially attracts more interest and trading in the token due to lower transaction costs and market impact
- Lower probability of price manipulation: higher liquidity makes it more difficult to manipulate the price of a token since more capital is needed to move prices
- Higher interest in the token project: more people trading in the token and possible listing on bigger exchanges create more interest and discussion around the token project
- Easier listing on major crypto exchanges: more reputable crypto exchanges are more likely to list a token on their platform knowing that there is a market maker committed in providing liquidity 24/7
Market Making Program for Crypto Exchange
Bluesky Capital can support both established and new crypto exchanges to help them achieve the following potential benefits:
- Higher trading volume: traders are more likely to trade a cryptocurrency if there is enough liquidity available because of lower market impact and execution costs
- Lower probability of price manipulation: higher liquidity makes it more difficult to manipulate the price of a token since more capital is needed to move prices
- Higher interest in the crypto exchange: usually liquidity attracts more liquidity, and at the same time more interest from traders and associated revenues for the exchange
How does Crypto Market Making Work?
Market making consists in providing liquidity on a defined cryptocurrency by submitting both bid and ask limit orders on a crypto exchange. Market makers make a profit by collecting the bid-ask spread over multiple trades. Fast and stable technology and proper risk management are essential to make markets successful.
Lose Ambiguity for an Increase in Market Stability?
Remember, the US Securities and Exchange Commission nor any other regulatory body does not have oversight over Crypto Exchange Markets. There is no “market maker” that is designated as a primary market maker (DPM), a specialized market maker approved by an exchange to guarantee that they will take positions in a particular assigned security, or in this case, a crypto token.
Buyers and sellers need not shed their ambiguity to gain DPM exchange/market stability, just the one (or more) designated “market makers” authorized by the crypto exchanges to become market makers. Only these individuals, brokerages, or other managed funds need to reveal their crypto account IDs, which should reinforce/reflect confidence in the market. By these players entering the market as DPMs, and publicizing their roles, volatility should decrease over time.
All other buyers and sellers can remain anonymous; that doesn’t change.
