UNDERSTANDING CRYPTOCURRENCY MARKET MAKING

Greetings,

It's your friend @mondraye and today I would be sharing another important content on market making.

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What is market making?

When we discuss market making, it is done by market makers and has to do with giving cryptocurrencies liquidity so that they can buy and sell by setting an offer and asking spread, which is how they make money.

Additionally, a user must pay a specific price when buying exchanges; this price is determined by the bid price, which is both the exchange's purchase price and its selling price. and these prices are determined by the various market makers, particularly when we see recent coins entering the cryptocurrency space with less liquidity.

These market makers typically profit on the difference between the buying and selling spreads, when they supply a large quantity and subsequently receive payment for it. The whole point of market makers is to create a method of liquidity for different cryptocurrencies by placing certain market orders, which are, as we all know, the market makers' providing and demanding orders.

Market makers are renowned as being experts and professionals in asset liquidation. They also set the prices for a given asset and control its activity. By buying and selling these assets, they often set asset prices, resulting in the liquidity of these assets through the buying and selling process. Market-making, then, is the process of providing liquidity for an asset by actions like purchasing and selling, and those in charge of this liquidation of an asset through the buying and selling process are referred to as market makers.

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As demonstrated in the figure above, market-making refers to the operations of market liquidation, which involve the market's purchasing and selling of cryptoassets.

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The study behind the market makers

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The goal of all market makers is to keep an asset in a position where its value won't decrease, whether that be by liquidating it when necessary or by providing certain liquidity to cryptocurrencies. They also aim to maintain a constant equilibrium with regard to the purchasing and selling price. Their top priority is to ensure that these assets increase in value. Other investors are also somewhat involved in this practice of maintaining and profiting from an asset's growth, so their priority is to ensure that the asset reach a certain level of growth.

All market makers want to keep an asset in a position where its value won't fall, whether that means selling it when it's essential or giving cryptocurrency a particular amount of liquidity. In terms of the price of buying and selling, they also strive to maintain a steady equilibrium. Their first priority is to make sure that the value of these assets rises. It is important to them that the asset reach a specific degree of growth because other investors are also partially involved in this process of preserving and earning from an asset's growth.

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Benefits of market marking

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There are clearly benefits to the market making idea and some of them are listed below.

• Making liquidity available

Without market makers, the supply and demand of assets would not be balanced on the market. As a result, the market makers contribute to maintaining the equilibrium, which prevents sale orders from outpacing buy orders and vice versa.

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• Prediction of market direction

Retail traders can gain an advantage in the market by predicting the next movement of the market thanks to the activities of the market makers in the cryptocurrency market. One can also find the ideal order point to place a buy order or a sell order at this point. So long as the market actions are carefully observed and followed, one is certain to profit from the market.

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• Asset price control

Certain market assets are subject to price value control by market makers. Market makers can raise the buying and selling prices after noticing a decline in the price value of a particular asset. Small investors will then start trading at that price, and we will then be able to see an increase in the asset's price value.

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• Escape loss

When we see a sudden, extraordinary rise in price value for a particular cryptocurrency, it simply asks us to stay away from that market because the market makers do this on purpose to trap small investors in the market who are ignorant and tend to dive into the market at that particular time. This is how one can understand what the market makers are trying to do with respect to a particular cryptocurrency. After some time, the market experiences a significant retracement, during which the market makers are taking profits earned from their prey—the unsophisticated little traders who rushed into the uptrend—to cover their losses.

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Demerits of market making

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Less liquidity to assets

Market makers frequently provide liquidity to specific currencies to maintain supply and demand for these assets, but in cases where we see little trading activity for an asset, this is due to the market makers' behavior with regard to the asset, and as a result, we see a massive dump of these assets due to their low price.

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• Gains

Frequently, market makers take advantage of the little investors in order to profit from the sale and purchase spread (bid and ask). then frequently pour money into the market to profit from small people who are only making pennies on the dollar, which is terrible.

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• Price manipulation

Knowing full well that they have the capacity to control the price value of assets on the market, people often spend a significant amount of money into a coin to increase its worth, only to subsequently sell it when they are pleased, causing the coin to lose that value. Therefore, they have power over asset value when they are aware that it only serves their interests.

CONCLUSION

Understanding the activity of the market makers in the cryptocurrency trading market is crucial because it will help you decide when to enter and quit the market, preventing losses and maximizing gains. Therefore, in order to be on the safe side, it is needed of you as a trader to grasp the movement and trend that the market is being forced to take by the market makers.