The volatility and versatility of crypto tokens have brought them to this point where they serve more purposes than trading. Given that, the most common stream to make money using crypto is still trading. The volatility can sometimes be a bane to trading and the crypto asset market. The clash of buying and selling prices can create an imbalance leading to illiquidity. The more liquidity an asset has, the easier it is to buy and sell without affecting the price too much. Thus, the wall street catalysts called ‘market makers’ are also required as a Crypto Market Maker to maintain liquidity in the crypto economy. 

What is a crypto market maker?

A Crypto market maker is an individual or a member of a firm or an exchange who performs the process of providing liquidity for a specific cryptocurrency by settling both bid and ask limit orders on a crypto exchange. Market makers have to collect the bid-ask spread over numerous trades, which is how they make money. A crypto market maker can also participate in the security market and provide trading-related services for investors.

Related article: How to launch a cryptocurrency exchange?

How does a crypto market maker work?

As the name suggests, a crypto market maker creates the market by buying and selling the assets themselves. They make the market viable by providing liquidity. Let’s say a market maker buys an asset for $100 and sells the same for $102. There is a difference of 2 dollars between the bid price (buying price) and the asking price (selling price). The difference in the two prices is called a spread, also that’s how much a crypto market maker is rewarded.

Related article: What is a Peer-to-Peer (P2P) crypto exchange? How does it work

Why do crypto markets lack liquidity?

Liquidity indicates how quickly a crypto asset can be bought or sold in a market, reflecting its native value. In simple words, the liquidity of an asset is the rate of its availability to trade it anytime. The easier an asset is to convert into cash, the more liquid the asset is.

The well-moving cryptos, especially in the top 10, don’t have liquidity issues. They can survive even if the bid and ask prices are the same. Smaller crypto tokens are trapped in an ICO liquidity vicious cycle. One possible explanation is the lack of proper market makers to provide liquidity to the token.

ICOs, crypto exchanges, and investors contribute to a token’s liquidity. But, for crypto investors to participate in an ICO, the crypto token should have promising liquidity. Thus a vicious cycle of crypto liquidity is formed due to illiquidity.

Let’s break it down to the key players in a token’s liquidity and how they are a part of this vicious cycle.

Crypto Market Maker : Key Players In A Token's Liquidity

ICO issuers

Conducting an ICO is one of the wisest ways to raise funds and create liquidity. But getting a token listed on an exchange for ICO is costly for a new token. ICO issuing for an illiquid token is ruled out as an option to gain liquidity despite being an important factor.

Crypto exchanges

Getting listed on crypto exchanges is also identified for your token based on the exchange type and popularity. Healthy trading on exchanges ensures liquidity. But the cost of setting up the environment for the new token includes due diligence, cold storage, and a lot for the exchange. And they are not going to take in a token that does portray a confident liquidity graph.

Investors

Tokens that are not liquid are very easy to disrupt. Investors who know what they are doing will not invest in a market prone to havoc because of illiquidity. Thus, the investors who are the driving force of a token cannot come into play in a situation of illiquidity.

Related article: Bridging the cryptocurrency gap between retailers and consumers

How can crypto market makers solve the ICO liquidity problem?

Liquidity and exchange listing

Exchanges charge quite a bit to list a new token as setting up cold storage etc., is costly., Thus, exchanges are very careful about the token they list as they do not want to deal with low liquid, which affects them. The ICO listing issue that arises due to low liquidity is taken care of by market makers, and, thus, more chances of getting listed on exchanges.

Crypto market maker for new investors

A market-maker spread is a difference between the bid and asking prices. The small spread values encourage new investors as they can trade in and out easily without much at stake. More diverse investors are also attracted to tight spreads, which allow room for strategies that may not work in higher spread differences.

Investors are convinced to buy a token if its liquidity is convincing enough. Lower liquidity tokens are prone to their market being disrupted easily, which is bad for investors. Even a small transaction can cause a ripple effect. Higher and stable liquidity prevents this chain of issues while luring in new and satisfied investors.

Liquidity attracts liquidity

More liquidity means more orders in the record. Since the number of buyers (also known as market takers) increases, market makers increase the size of their orders. The trading volume will go up, which can attract more market makers. You can also set up a secondary ICO listing.

On the brighter side, your crypto will not require market makers forever. A token needs market maker support until the volumes are good. After that, the token will have a stable ecosystem.

Increased token price

A higher volume ICO catches the eyes of investors as many will consider the token as an investment. Thus, the demand increases and so dies the price.

Related article: What is the best token sale model for your ICO?

What are the benefits of being a crypto market maker?

Let’s look at the important benefits a crypto market maker can offer

Increased market liquidity
Crypto markets with lower liquidity rates will generally have vast bid-ask spreads, which can increase the volatility of the asset. Traders face difficulty getting a good price for their trade and fulfilling their orders. Market makers play an important role in maintaining and increasing liquidity.

It prevents extreme price volatility
The low liquidity makes it easier for a few traders to manipulate the token’s price. Crypto market makers help prevent this by controlling the bid price to the asking price.

Increased trading volume
Higher liquidity attracts more investors as transactional fees are reduced. The market impact of a token is also enhanced due to higher liquidity.

Easier listing on exchanges
Listing on exchanges becomes easier as market makers ensure promising liquidity. Exchanges are likely to set a lower fee if a market maker is attached to the crypto.

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Closing thoughts

ICO is one of the best fundraising techniques for crypto. It demands the token to have stable liquidity for an attractive tokenomics, which helps in ICO listing and investor acquisition. But liquidity does not brew by itself, especially for new crypto. Catalysts like a crypto market maker come with strategies to increase the liquidity of a token using the ‘bid and ask’ system. Market making is one of the important tools to consider while you are planning on an ICO launch.

Related article: How to make your ICO successful?

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