Market Making and Market Liquidity in Cryptocurrency

cryptaldash (42)in #cryptocurrencies • 6 years ago (edited)

Market making is significant in the cryptocurrency markets. It has become increasingly important for the markets specifically in ensuring market liquidity. However, not all of the market participants understand how it truly works and there are still gray areas as to the role played by a market maker.

Market making is as important as the market structure itself. It is a process that can provide opportunities for the prevailing financial markets to function and operate smoothly. A market maker can either be an individual or a financial institution that provides bids and come up with prices to correspond to certain marketable securities such as in the case of cryptocurrencies. The task of a market maker does not end there. They are tasked to provide sufficient liquidity to reduce and balance out price volatility and be able to buy and sell the said marketable securities for fair and reasonable prices.

Focusing on the cryptocurrency markets, market makers play a pivotal role in the course of forging profitable and valuable exchanges and in establishing efficient market mechanisms. Market makers create opportunities and advantages for the investors such as in terms of creating avenues for market liquidity, in eliminating delays in cases of orders, and in ensuring that spreads are well-stabilized.

1. Creating Avenues for Market Liquidity

In the realm of cryptocurrencies, liquidity provides a clear measurement as to how fast a particular cryptocurrency is bought or sold in a certain market platform without compromising the cryptos’ value. Because no trader wants to invest in a low volume token or in some other cases not all traders have the capital to invest to the market and incur unnecessary risks, this is where the market makers do their magic. They make it easy for traders to participate in the market by creating avenues for market liquidity.

2. Eliminating Delays in Cases of Orders

We all know that trading can be characterized as a zero-sum game. In this case, market makers adopt strategies to ensure that a buyer is suited for a particular seller and vice versa. It is one of the tasks of a market maker to search for buyers for a certain currency and thereafter pair it with specific sellers catering for the same currency. In this case, delays in order fulfillment can be minimized and in most cases eliminated giving fewer worries and risks on the market participants’ end.

3. Ensuring that spreads are well-stabilized

Market makers make it possible for spreads to be stabilized in line with its role in providing market liquidity. They fixed prices and keep them at a reasonable level, hence providing sound and well-organized entry points for traders. Furthermore, traders in the cryptoindustry through the help of market makers can incur savings in their respective trades.

In sum, market makers make the dynamics and exchanges in the crypto industry more easy, convenient, and efficient for the market participants. It can increase investors’ level of confidence in dealing with the financial markets. Indeed, market makers simplify the prevailing complexities in the cryptocurrency markets.

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