The Role of Crypto Market Makers in the Blockchain Ecosystem

Cryptocurrency trading rests upon one central factor: liquidity.

Liquidity is the ability of one coin to be bought, sold, or exchanged for another without impacting its price. High liquidity in a cryptocurrency ecosystem allows for rapid trading for all parties involved and is the mark of a stable currency. 

On the other hand, a crypto with low liquidity means that selling or buying that currency may be impossible. Simply put, there may not be enough of a currency to facilitate your trade, or no one is looking to buy at that one time. The largest cryptos in the world have extremely high liquidity, with the substantial daily trading volume of currencies like Bitcoin demonstrating their liquidity.

While major cryptocurrencies have high liquidity simply due to the demand that follows them, not all coins are in the same boat. In an effort to solve liquidity issues, some providers will rely on crypto market makers. In this article, we’ll explore what a crypto market maker is and outline how they benefit the cryptocurrency ecosystem.

What Is a Crypto Market Maker?

A crypto market maker is a company, platform, or system that helps to increase the liquidity of a cryptocurrency. Market makers will actively receive information from buyers and sellers, making note of how much an asset is being bought and sold for. By rapidly analyzing this information, they can determine a more accurate value for the crypto.

From there, a crypto market maker will place a large number of buy and sell offers on the market using the accurate prices that they have established. By creating these offers, it ensures that whenever someone goes to trade that currency or currency pair, there is always sufficient liquidity for the trade to occur.

Especially with cryptocurrencies that are just finding their feet in the industry, the availability of market makers to provide liquidity can be a major asset. Typically, market makers will offer these services in partnership with some cryptocurrencies or in order to turn a slight profit between the different price spreads they offer.

How Do Crypto Market Markers Benefit Cryptocurrencies?

Crypto market makers often have a direct connection to the success of a cryptocurrency. Without available liquidity, a trade simply cannot occur as, there aren’t enough people looking to buy or sell at a certain price to meet and exchange cryptocurrency. Especially on large-scale trading platforms, a lack of liquidity can impact profits for the exchange itself, as they are unable to profit a small margin from any active trades.

Market makers are also a common occurrence in centralized markets, with many firms existing that specialize in providing liquidity to certain markets. The blockchain industry is no different, with its 24/7 style of operation needing a high degree of liquidity to ensure traders from across the globe can trade on demand.

Beyond just providing liquidity, there are several benefits of crypto market markers in the wider crypto ecosystem.

Connect Buyers and Sellers

While crypto market makers do create their own offers, they also act as a mechanism of connection for buyers and sellers. Without liquidity, when a seller wants to move their cryptocurrency, they are unable to do so as there is no existing demand. Equally, if a buyer were to place an order, there would be no sellers to provide the desired cryptocurrency.

With that in mind, creating a system of offers helps to ensure that either one of these parties is instantly connected to a counterpart. The seller is able to sell through the market maker, which, in turn, ensures that there is then liquidity available when a buyer comes along.

By facilitating these trades, crypto market makers ensure that there is always incoming and outgoing liquidity in the form of new trades. While some may be covered directly by the makers themselves, others may come in the form of a connection between buyers and sellers facilitated by the platform.

Stabilize Prices

Another central function of crypto market makers is to identify what a cryptocurrency is currently worth and create buy and sell orders to ensure that trades consistently occur at fair rates for all involved parties. When there is a lack of liquidity in an ecosystem, a buyer could have to pay far more than they want to buy from the only person who is actively selling their cryptocurrency.

A market maker overcomes this issue by ensuring that there is always a fair price available for anyone who is looking to buy or sell. This approach reduces the likelihood of a major swing in price, helping to create a more consistent and stable cryptocurrency. 

Enhance Market Confidence

One wider benefit of the presence of crypto market makers in the blockchain community as a whole is to help improve investor confidence around a cryptocurrency. Many cryptos have had a difficult past, especially over the crypto winter, which has reduced public belief in their value as an investment.

When a cryptocurrency has a high amount of liquidity, there will be a large number of trades that occur with that crypto each day. When investors go to investigate leading cryptos and see a constant influx of new trades and a high daily trading volume, this demonstrates the reliability of cryptocurrency.

Over time, the sustained liquidity that market markers can bring to the industry helps to create a better investment culture for all parties.

Final Thoughts

Crypto market makers are an essential part of the wider cryptocurrency ecosystem. Without a reliable flow of liquidity, many cryptocurrencies wouldn’t be able to establish a network of active traders. The ability for market makers to use data collection and synthesis to determine precise costs of certain cryptocurrencies and then provide liquidity for both buyers and sellers helps to keep money moving in and out of the blockchain ecosystem.

High-volume crypto market makers are vital for the longevity and sustained health of cryptocurrencies and their relevant pairs. Whether through a company, whale investor, or exchange platform, top exchanges routinely rely on market makers to streamline trading and ensure that any trade has enough liquidity to occur.