What Is a Market Maker in the Crypto Market?

Trading Made Easy 2022-07-25 13:51:11

In this article you will learn how Market Makers operate and serve the world of Cryptocurrency Trading.

What is the Role of The Market Maker?

The term market maker refers to an individual or a firm that places an order to buy and sell digital assets at a quoted price on cryptocurrency exchanges.

Market Maker Vs. Market Taker

Market makers create orders while the market takers accept those orders to complete the cycle of market trade.

A market taker is an investor or a company that places an order to buy a digital asset at the available current market price. Individuals who buy or sell crypto assets are instantly called takers. Thus, makers create orders, and takers fill those orders.

A Market Maker Plays a Number of Important Roles

Provide Liquidity 

Market makers provide liquidity to the markets, allowing you to buy and sell crypto assets quickly at the desired price. 

Liquidity refers to a state of market condition where the purchaser or seller can quickly buy or sell the digital assets without affecting price changes in the market.

Placing Limit Orders On The Order Book

The market makers set a price limit for the purchase or sale of crypto assets. The order is placed on the order book of the exchange. Orders are placed in order according to a first-in, first-out basis. 

While market makers contribute to providing liquidity to the exchange, market takers take advantage of this factor to quickly enter or exit positions from the marketplace.

Crypto Spread Trading

Market makers make it possible to establish a trade market that ensures an abundant volume of trade where buyers and sellers are always ready to purchase and sell crypto assets at a given price. 

How Does The Market Maker Earn His Profit?

Market makers strive to make a profit from the spread, which is the gap between bid prices and ask prices. 

Small spread means narrow bid and ask prices that indicate ample liquidity of the digital asset. The close bid-ask spread helps investors to make it easy to enter and exit their positions. 

Cryptocurrency exchanges intentionally flourish liquidity on their platforms in order to attract more market makers and market takers. No individual or platform can get an incentive from an abundant volume of trading without the presence of takers. Makers provide liquidity to exchanges. It means traders or investors can buy or sell crypto assets on the exchanges without facing any restrictions. 

Let’s explain the earning mechanism of the market maker by giving examples to understand how market makers earn their profit. 

Example 1

For example, Investors have a bid price of Bitcoin for $30,000 and the ask price of $30,500. It means the Market maker is willing to buy Bitcoin at $30,000 and sell it for $30,500, making a profit of $500. Additionally, Maker fees will be deducted from the profit. 

Example 2

An investor bought bitcoin at a price of $38,000, and he wants to sell it when the price hits $40,000. He places an order in the order book at a desirable price. Now, the investor is playing the role of the market maker who “made” the crypto market. Eventually, this order will be filled by the market taker when the price of Bitcoin reaches $40,000. 

When the order is filled and executed, the exchange platform will charge a fee for matching the trade. In comparison, the maker fee is less than the taker fee because makers provide liquidity to the platform. 

Investors can earn a profit after deducting the maker fee. You can see the maker-taker list of pricing at crypto exchanges on their fee schedule.

Do Market Makers Lose Money?

Yes, they can. If the market sell order will be filled with the best bid price or lower price than the market price, or alternatively, the market buy order will be filled with the best ask price or higher price than the market price. 

The market maker could lose money if they oppositely fill trade orders as described above. Basically, in these situations, they pay for the placement of the order and get nothing. 

Market Makers: Are They Good or Bad?

A market maker provides liquidity to the crypto market. They inject lifeblood into cryptocurrency platforms because they boost up investment activities. They don’t hold assets for a long time, and they keep driving the consistent trade of digital assets round the clock. 

Market makers are good in the sense of expediting trade activities on trading platforms. They post bid prices and ask prices to ensure market liquidity. If you want to buy a digital asset, they are willing to sell you. Alternatively, if you want to sell the asset, they are ready to buy that asset.

A high liquidity providing platform attracts investors and traders to buy and sell crypto assets. The majority of investors prefer exchanges with a high trading volume.

Can Market Makers Manipulate Cryptocurrency?

Yes, market makers can manipulate cryptocurrency prices by placing various orders. By doing so, they profit from buying digital assets at a low price and then selling them at higher prices.

Can Cryptocurrency Exchanges Manipulate Cryptocurrency Prices?

Centrally controlled crypto exchanges act as the market makers. They purchase enough assets to control the supply of crypto assets and set the price for it. They create their own liquidity to attract takers. This leads to increased trading volume and liquidity on exchanges.

Can Decentralized Exchanges Manipulate the Crypto Market?

In order to create liquidity on their platform, decentralized exchanges use the automated market maker model. DEX uses an algorithm to predict order flow, and makers use them to set order, making manipulation. Some traders see it as an unfair tool to manipulate crypto prices.

Broker Vs. Market Maker

Brokers and market makers are both essential players in financial markets.

Market makers sell and buy digital assets at quoted prices, providing liquidity to the markets. Brokers, on the other hand, are intermediaries who help investors buy financial assets. 

A broker is a licensed expert who is registered with Financial Industry Regulatory Industry (FINRA). Their goals are to serve their clients. Brokers deal in traditional financial securities such as stock, mutual funds, and exchange-traded funds. 

There are two main types of brokers; full-service brokers and discount brokers.

Full-Service Brokers 

Their role is to provide a wide range of consulting services such as investment advice, retirement planning, etc. They tend to charge high commissions for their high-standard services.

Discount Brokers

Discount brokers are usually online brokerage firms that allow traders to trade at a low cost online.

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