With the increasing acceptance of cryptocurrencies as viable and safe financial assets, and the rapidly growing number of crypto exchanges around the world, market making in the crypto space has become an increasingly common, yet still largely unexplored, industry. There are many advantages to market making, particularly in the crypto space, and market makers play an important role in the adoption of cryptocurrencies by people around the world. In this article, I aim to elaborate on the benefits of market making to newcomers, explain what market making is, and provide a basic guide and tips to entry into this exciting new industry.
What are the benefits of market making in the crypto space? The benefits of market making in the crypto space are:
- Greater volatility, which means higher profits for market makers
- Market makers can set their own spreads (fees)
- Crypto market makers have access to market making bots, which can be configured to behave in different ways depending on market conditions
- Market Makers do not need to be licensed financial institutions
- Crypto markets trade 24/7 (unlike traditional financial instruments)
- Cryptocurrencies can be bought or sold with equal ease
- Market makers manage their own inventories
- There are very few to no overheads for crypto market makers
- You may be able to take advantage of certain tax benefits on the profits you make as a crypto market maker (depends on your region)
In the sections that follow, I discuss these and other aspects of crypto market making in more detail. Read on to find out more about the benefits and advantages of crypto market making and how you yourself could may even be able to become a market maker!
What Are the Benefits of Market Making in the Crypto Space?
There are a number of benefits to market making in the crypto space, both for market makers themselves as well as for the traders that comprise the markets they trade in. Let us examine them individually:
1. Crypto Markets Are More Volatile Than Other Markets
Although one of the benefits that market makers bring to the market is market stability, cryptocurrencies are still relatively volatile, which means that there is generally a greater opportunity to make profits than with most other traditional financial instruments.
2. Market Makers Set Their Own Fees
As a market maker, you will most likely be using market making software, which enables you to set your own spreads (more on that later) and control various other aspects of the trading process. This means that you have full control over the prices you offer to traders and how they interact with the service you provide.
3. Crypto Market Makers Have Access to Market Making Bots
Efficient market makers use market making software (also known as market making bots), and this is one of the most significant benefits of market making in the crypto space. Market making bots are programs that can be linked up to exchanges by means of APIs and can be configured and adjusted at any time in order to provide the most favorable spread for both traders as well as market makers. Examples of such trading bots are Hummingbot and Cryptohopper and some market making bots are even open-source.
4. You Do Not Need to Be a Licensed Financial Institution
All you need is an account with an exchange, such as Coinbase Pro or Binance, that provides an API for you to connect your market making software to it. Some market making software, such as Cryptohopper, can be configured to connect to specific exchanges, more or less automatically, by means of selecting the exchange from a list of possible options during the setup phase. There is no one to regulate you or force you to comply with any rules regarding the prices you offer, etc.
5. Cryptos Never Sleep
That’s right, unlike the Forex market, which only trades on weekdays, and the stock market, which for some stocks is only open for as little as two hours per day on weekdays, cryptocurrencies can be traded 24/7, which means that your market making never has to stop.
6. Cryptocurrencies Can Be Bought and Sold with Equal Ease
Unlike certain other markets, cryptocurrencies can both be bought and sold with equal ease.
This means twice the number of opportunities for traders to enter the market. As a market maker, you could thus potentially take advantage of twice the number of trades (some markets can only be bought, not sold), which in turn translates into double the amount of commissions for you over time.
7. You Manage Your Own Inventory
Only you have access to your crypto assets, which means that you do not have to go through complicated transfer and auditing processes with banks and other financial institutions. Your inventory is stored in your own encrypted wallet / account and can only be accessed by you.
8. There Are Very Few to No Overheads
As a market maker, you will generally have no expenses other than your internet bill, the cost of your market making software (if applicable) and the transaction fees that your exchange charges.
9. Potentially Tax-Free (in Some Regions)
Insofar as your profits are earned in crypto, they can theoretically remain anonymous if you take certain steps to protect your privacy and don't cash out your crypto profits (assuming your profits are being earned in crypto directly). This may or may not be an advantage depending on how friendly your government is to cryptocurrencies, but an increasing number of countries, particularly in Europe, are passing legislation to help include cryptocurrencies as a more mainstream part of their economies.
Do bear in mind, however, that currently even countries like Japan, which has been lauded for its positive stance and rapid adoption of cryptocurrencies as legal financial assets, charge from 20% to 55% tax on all profits obtained in crypto.
Becoming a Market Maker – Basic Guide and Tips
Despite the widespread abuse that was commonly seen in the crypto market making space over the last few years, particularly in and around 2017, as well as the misconceptions that still remain about market making in general, it is important to understand that market making is a legal and useful service that anyone with the necessary knowledge and tools can provide.
The increasingly stable nature and rapid adoption of cryptocurrencies has become undeniable.
This, and the increasing reliability and professionalism that have come to the space with the ever-growing number of DApps (decentralized apps) and 2nd-generation blockchain systems that are being implemented in almost every industry — from finance to real estate and everything in between — has resulted in the crypto market making industry becoming an increasingly viable and accessible endeavor for anyone with an internet connection, an account on an exchange, some funds, and the necessary knowledge and tools.
Market making in the crypto space has a great deal of potential, especially right now, since the space is not yet over-saturated.
Now let us first examine some basic concepts that are essential to understand as a market maker. These apply to market making and trading in general and are fundamental aspects of how market making works.
What Is Crypto Market Making?
In order for traders to be able to buy or sell crypto assets (tokens and cryptocurrencies such as Bitcoin, ETH, etc.), it is necessary for them to have access to someone that is always willing to both buy or sell the assets that they are interested in. Since it is unlikely that they would be able to find such a person at short notice, market makers solve this problem by offering to both buy and sell such assets whenever traders may need them. They therefore provide liquidity to the market.
What is Liquidity?
Simply stated, the liquidity of an asset is its availability for buyers and sellers to easily trade it at any given time. By having an open “bid” price (price at which the market maker is willing to buy from traders) and an “ask” price (price at which the market maker is willing to sell to traders) whenever traders want to trade, market makers thus provide liquidity to the market.
In other words, they facilitate the availability of assets (in our case crypto assets) in the market.
Why Are Market Makers Important?
In addition to providing liquidity to the market, another indirect benefit that market makers bring to the market is the reduction of price volatility, which means that they make the market more efficient and assist with the discovery of fair prices. In trading, this is known as “market efficiency”, i.e. providing assets at reasonable prices, thus facilitating consistent market activity and avoiding market stagnation.
How Do Market Makers Earn Their Profits?
The difference between the “bid” and “ask” prices (also known as the “bid-ask spead”) is the profit margin which the market maker earns on every trade which is filled (successfully executed).
It is important to note that any transaction fees that may be charged for crypto asset transfers are covered by the market maker, so the spread must be sufficient for the market maker to be able to cover these.
At the same time, the spread should always be as tight as possible (for the asset that is being offered) in order for traders to be able to buy or sell without losing too much on each trade. The ideal spread is thus a balance between the spread and the volume at any given time. Good market makers should always seek to maintain this ideal balance so as to ensure both a high market volume (which translates into more trades) as well as sufficient profits for themselves.
Are There Any Risks to Market Making?
The risk that market makers face is that any assets they buy could in theory decline in value so quickly that they are not able to cover their losses by means of their spread. This is why, in times of extreme volatility, the spreads on financial instruments (including Forex and commodities) are usually much wider than usual. Although such extreme volatility is not the norm, even in the case of cryptocurrencies, it is something that market makers in any market should always be aware of.
How to Become a Market Maker
There are basically two ways that markets are made: manual and automated. However, the second method is by far the most efficient, for both the market maker as well as traders, and is achieved by means of market making software (also known as market making bots), which I have described above.
Some Tips on Market Making (by Someone Who Has Done It)
So, you want to become a market maker. Here are a few tips to get you started:
- Use market making software. Market making bots enable you, as a market maker, to essentially automate the trading process, which is far more efficient than trying to do it manually in the fast-moving world of live crypto trading.
- Find out about exchange APIs. Good exchanges will provide robust APIs so that market makers can ensure reliable data transfer times and uninterrupted liquidity.
- Market making requires work. Although market making can essentially “run on autopilot” for the most part, it does still require market makers to closely monitor asset pairs and frequently modify settings and spreads via their market making software in order to remain competitive and ensure maximum profits for themselves under different market conditions.
- Check market volumes. The number of people currently trading any market is very important in determining what your spread should be.
- Choose your markets! It is generally not a good idea to try be a market maker in markets that are oversaturated, especially if you are new to market making. Pairs like the BTC/USDT have a lot of volume but there are hundreds of market makers offering very tight spreads on such pairs already. This means that you will have to compete with tighter spreads for such asset pairs.
- Remember this formula: High volume = lower spread; low volume = higher spread. This means that you can either have access to more traders at lower profits per trade, or you can take advantage of markets with less volume at higher profit margins per trade.
- Check asset statistics and compare them. Sites like Coingecko and Coinmarketcap are a good resource to check asset trading volumes and compare market prices. You will want to monitor these constantly to remain competitive.
If you have made it this far, you should now have a good understanding of the benefits of market making in the crypto space and be able to make an informed decision as to whether it is something you would be interested in pursuing yourself.
If you have any topics or questions you would like me to write on, let me know in the comments.
~Don Hartig
Fintech, Crypto, Blockchain Technical & Copywriter | Former Blockchain Engineer (Architect and Developer of the "丝路币" cryptocurrency, the mobile and PC wallets and the "丝路链" public ledger) | World-Renowned Linguist in 7 languages (currently ranked No. 3 in the world for Mandarin Chinese to English translation only native English speaker in the Top 17)
Email: [email protected]
Twitter: @donhartig
Notes by author:
1. Used the following spelling conventions for crypto-related terms:
i. “blockchain” instead of “block chain”
ii. “cryptocurrency” instead of “crypto currency”
2. I used the standard Google-optimized Response Post format for optimal ranking. The article structure is as follows:
- TITLE
- Lead-in paragraph
- Answer (bolded for Google webcrawlers)
- Read-on paragraph
- Detailed Answer and 1st subheading (H2)
- Further Subheadings
3. For the title capitalization, I used the Chicago Standard Format.
#FinTech #Crypto #Writer #Copywriter #Content #ContentWriter #English #Native #Blockchain #Cybersecurity #Market #Trader #Forex #Currency #Commodities #Marketing #Manager #AssetManager
#中文 #流利 #母语 #英文 #文安 #协作 #作者 #推广 #高级 #内容 #经理 #主任 #区块链 #交易员 #交易所 #内容管理 #私人资产经历 #会中文 #社交推广 #专家
#フィンテック #暗号通貨 #ライター #コピーライター #コンテンツ #コンテンツライター #英語 #ネイティブ #ブロックチェーン #サイバーセキュリティ #市場 #トレーダー #外国為替 #通貨 #商品 #マーケティング #マネージャー
#Krypto #Autor #Texter #Inhalt #Englisch #Muttersprachler #Cybersicherheit #Markt #DevisenHändler
#comerciante #divisas #redactor #escritor #gerentedemarketing #traductor #chino #hablante #nativo
#rédacteur #écrivain #responsable #marketing #traducteur #Chinois #locuteur #natif #anglais
