The Economics Of Cryptocurrency Market Making

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Introduction

When cryptocurrency was first introduced into the world or market many were skeptical and doubted the motive behind it and its ling term viability and sustainability however, time was to be the judge and as we can all see, time has proven otherwise seeing as the cryptocurrency market has grown, to become a significant component of the global financial system.

The economic factors responsible for the significant growth of the cryptocurrency market over the years are numerous however, one of them is market making, it plays a very important role in the cryptocurrency ecosystem, it is responsible for providing liquidity, reducing volatility, and ensuring efficient price discovery.

Therefore in this post of mine, I am going to be exploring and explaining some of the economic principles that backs up market making as one of the economic factors in the cryptocurrency market that is responsible for its exponential growth over the years.

• Provision Of Liquidity

When they say an asset or cryptocurrency has liquidity it simply means that the asset or cryptocurrency can be sold or converted to fiat currency without it having or causing any significant changes in the price or value of that asset or cryptocurrency, liquidity is very important to ensure the proper functioning of the cryptocurrency market.

Therefore when it comes to providing or ensuring liquidity in the cryptocurrency market, market making can be a process which facilitates the constant and continuous offering of assets at quoted prices both for purchase and sale,

it is therefore safe to conclude that market making practically ensures that traders can enter and exit any positions at any time without it causing or having any significant effect on the price of cryptocurrencies.

• Price Discovery

Price discovery can simply be said to consist of all the processes involved in choosing, determining and fixing the prices of assets or cryptocurrencies in the cryptocurrency financial market, this process of price discovery face certain challenges that makes it difficult to decide on a certain price.

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One this challenges can occur as a result of the volatile nature of the cryptocurrency market and also it's decentralized nature that allows for their to be many different exchanges who are independent from any form of control of any other exchange platform therefore making hard for there to be a consensus.

However, through market making and all the activities involved in it like providing quoted prices as a result of their assessment of the supply and demand market dynamics they can help determine a more accurate and fair price based simply on the market value of the cryptocurrency.

• Risk Management

The cryptocurrency market is the first successfully launched digital currency based financial market and with this newly introduced and created market there will be also new risks which users would lack the skills to manage therefore, to prevent the cryptocurrency market from becoming a blackhole that leads to its users financial ruin it is important to learn risk management.

The cryptocurrency market owing to its volatile and unpredictable nature can cause significant financial losses to its users, therefore that is why effective risk management techniques and strategies are included in market making processes so as to be able to navigate these risks in which the cryptocurrency market poses.

Diversification is one of the many techniques and strategies in which market makers must employ to prevent or mitigate significant financial losses, it basically involves investors or traders spreading their investments and trading across multiple assets and trading pairs.

• Competition And Market Dynamics

Owing to the exponential advancement and growth which the cryptocurrency market has shown and the potential it has to still grow and develop many individuals and investors have made and created exchanges and become involved in market making and as a result it has created a kind of competition in the cryptocurrency market.

Additionally, this competition has led to significant growth and innovation as each cryptocurrency based networks and institutions try improve the usage experience of their users, as a result leading faster transaction process and confirmation time and improved liquidity just to mention a few.

Furthermore, the need for the trust and validation of its users, ensures that there will be a continuous and constant growth, advancement and adaptation in the cryptocurrency financial market and its ecosystem.

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Conclusion

To round it all up, the process of market making really plays alot of significant toles in the growth of the cryptocurrency financial market world wide, thank you to everyone who made the effort to read and go through this post which I have made, and I hope that you have been able to learn something new.