Yellow Capital Blog/Crypto Market Making/Is Crypto Market Making Profitable?

Is Crypto Market Making Profitable?

Tuesday, April 25, 2023

Market makers play an all-important role in ensuring the proper functioning of the crypto market, which can be quite a profitable venture, as market makers take a small profit off each trade that’s placed. Read on here to learn more about how crypto market makers get profits.

Crypto market makers are individuals and financial institutions who submit large volumes of both bid and ask limit orders of a particular digital asset on crypto exchanges; serving as an important component in facilitating liquidity in the crypto markets.

While they play an all-important role in ensuring the proper functioning of the crypto market, the highly volatile nature of cryptocurrencies often leaves them at risk. On the other hand, crypto market making can be profitable, as market makers take a small profit off each trade made due to the spread between the bid and ask prices.

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How Do Crypto Market Makers Make Money on the Spread?

The spread is the difference between the price the market maker offers to buy a crypto asset for and the price they offer to sell it for.

Generally, crypto market makers would offer to buy a crypto asset for less than the current price of a crypto asset and look to sell it for more than the current quote price.

For example, if there is a $0.08 spread on a crypto asset, a market maker would offer to buy $100 worth of that crypto for $99.96. However, when they offer to sell the same volume of that crypto asset (without accounting for a possible change in price), the market maker would sell the $100 worth of that crypto asset for $100.04.

This difference between the bid and offer price is how crypto market makers make money via the spread. While the spread might not appear to be very substantial, the crypto market makers engage in large volumes of trades on a daily basis, running into millions of dollars. On a spread of $0.08, a crypto market maker would make $8,000 for completing buy/sell trades worth $8 million.

The spread of a crypto market maker is usually between 0.5% and 10% - above which an order would be canceled on most crypto exchanges. In addition, crypto market makers must operate under a given exchange's bylaws approved by a country's securities regulator.

Market Makers Do Not Hold Cryptocurrencies

The highly volatile nature of cryptocurrencies means market makers could potentially profit (or lose) by holding a crypto asset. However, crypto market makers do not hold cryptocurrencies, as their basic function involves offering liquidity to ensure the smooth running of the market.

In a case where market makers for a crypto, XYZ, decide to hold the crypto for long-term profit, they stand to lose more than they possibly would gain. If all the market makers for XYZ do this, the crypto asset can temporarily become illiquid as no trades would be able to go through. As a result, crypto market makers are restricted to making profits from the spread they charge on crypto assets.

Do Market Makers Manipulate Prices?

Because crypto market makers are involved in setting the bid and the offer price of a digital asset, there can be confusion around what market makers do, and there is often the misinformed belief that market makers manipulate the prices of crypto assets. However, they do not have the ability to manipulate prices, especially on cryptocurrencies that have very high liquidity.

The higher the liquidity of a digital asset, the more difficult it becomes to manipulate the price of that token. This is because for a market maker to set the price for a highly liquid asset, like Bitcoin, which is listed on over 600 exchanges and has an average daily trade volume of over $30 billion, they would need an immense amount of capital to move prices. As such, the more liquid a digital asset is, the more impossible it gets for market makers to manipulate the prices.

On the other hand, cryptocurrency projects that have very low liquidity and daily trade volumes are easier to manipulate. In addition, crypto market makers are duty-bound to make a market and meet the needs of those they provide liquidity for.

Because crypto market makers are also in competition with each other, evident by the tighter spreads firms offer to get more customers, it is nigh-impossible to see market makers work together to influence prices.

Market Makers Can Be Highly Profitable

The spreads of a crypto market maker help compensate market makers for the risk they assume in being always ready to act as buyers or sellers of a crypto asset. However, while they set the ask and offer price of a crypto asset, market makers cannot manipulate the prices of highly liquid assets. Instead they help ensure the stable function of individual markets and make a small profit per each trade via the spread, which given the amount of trades taking place over the course of a day, and quickly add up, which is why for many, it’s worth becoming a crypto market maker.

Yellow Market Making

If you're interested in market making via your own exchange, then consider working with Yellow Capital. We provide organic market growth strategies including crypto market making, algorithmic trading, liquidity, token growth, exchange listing, and more. Get in touch with an expert crypto market making company today.

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Hi, I am Alexis Yellow

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Our investment strategy involves providing deep liquidity crypto market making to the projects we invest in. This approach allows us to ensure continuous and substantial liquidity in exchanges. By doing so, we aim to increase market efficiency and reduce price volatility. We help to stabilize prices and reduce the bid-ask spread, which can lower transaction costs for traders. This usually attracts more traders to the markets, by making it easier and less risky to trade your token which can help to increase the overall liquidity and trading volumes both for the benefit of traders and issuers. However, we recognize that providing liquidity also comes with potential risks, which we carefully evaluate and manage as part of our investment decision-making process.