Crypto Market Making: POV

There are many innovative crypto projects that have their own utility token or digital currency, yet most of them slowly fade out as a result of having illiquid markets. Project founders invest most of their resources into developing the technology, marketing, and managing the community.

While these are all important aspects of a project, often founders neglect keeping the order books healthy.

Does the following sound familiar?

There is little trading happening on the exchange you’ve paid big money to for a listing, and the secondary market who got FOMO from not investing in your ICO is now scared away by the large gap between the bid-ask prices in the order book. You thought it couldn’t get any worse? The first time one of your early investors tries to sell part of his assets he causes the price to drop by 20%. This causes a bunch of stop loss orders to be triggered placed by the several day traders looking at your token.

Even though the price of your token may slowly bounce back, the traders realize there is no liquidity depth in your order books and therefore it is impossible to efficiently exit positions. Traders and investors move on to a different asset that does not pose this liquidity risk.

The “gap” or spread between the bid and ask price of an asset is often times the reason of stagnant markets

Time and time again we see the same scenario playing itself out. Leave immature markets to manage themselves and eventually they may die. Most projects also die with their market.

Why your project should have a market maker:

New investors are attracted by markets with excellent liquidity
The tighter the spread (the difference between the bid and ask price) for your token, the cheaper it is to enter and exit positions.
A tighter spread will attract more sophisticated investors who are proficient in technical analysis (TA). TA is unreliable at best in a market with a large spread. Additionally, a sufficiently liquid market prevents large sell orders from having too much impact, resulting in more confidence for the investors.

A simple example on how to calculate the spread on an asset

Crypto exchanges
Getting listed on your first exchange: exchanges have significant costs to list new tokens such as due diligence, legal fees, technical integration etc. These exchanges mostly make their profits by charging trading fees. Therefore, exchanges prefer listing tokens backed by teams that have strategies in place to sustain and improve organic trading volume and liquidity. Sometimes having a dedicated liquidity provider can even be required by an exchange before they consider listing the token.

Keeping your token listed on the exchange: we have seen numerous projects get delisted after paying major listing fees due to the lack of trading volume. 

Securing additional exchange listings: your project will have more leverage in negotiating additional exchange listings when you already have considerable volume and liquidity on the current exchanges.

The liquidity snowball effect
Once your secondary market ecosystem starts growing, there are more orders in the order book resulting in even better liquidity for market takers such as investors, day traders, and speculators. Since the number of market takers increases, market makers can up the size of their orders. As the trading volume increases, more market makers will enter without the need for having a fixed fee paid by the project.

So, the best part is that you don’t need market making services forever. You need support from a market maker until the volume is sufficient to maintain the ecosystem on its own.

More volume and increased investor confidence results in a higher token price
More trading volume increases the visibility for your project which will result in more demand for your token causing the price to go up. Additionally higher trading volume also helps with business development as it is easier to form new partnerships when there is significant trading volume, making your project look very much alive.

Real market making is not about pumping and dumping

OK I get it! My project needs a market maker. But what does one do exactly?

It is wrong to think of market making as simple as running a trading bot. Yes, the custom built trading software is an integral part of the operations but it all starts with the insight and choice of strategy determined by the market maker. It requires a very specialized skill set to understand the order book, perform meaningful TA, consider the macro conditions etc before choosing a certain trading strategy for an altcoin.

The value add of a market maker laid out in simple bullet points

• Decreasing the spread between the bid and ask price in the order books

Objective: stimulating organic volume and avoiding price choppiness

It is pretty obvious that the first token is in need of a crypto market maker

• Improving liquidity depth

Objective: making your order books more resilient against large buy and sell orders

Example of healthy liquidity depth on Bitcoin

• Setting up the listing strategy

Objective: optimization of listing results

• Assisting in negotiations with exchanges

Objective: securing quicker and cheaper listings through their network

• Feedback on your marketing efforts

Objective: providing quantitative information on the effect of your marketing efforts on the order books eg. how much does a big announcement impact the buying demand on your token