Crypto liquidity refers to the ease with which a digital asset can be bought or sold in the market without causing a significant change in its price. High liquidity indicates that many buyers and sellers are present, allowing transactions to be executed quickly and at stable prices. Conversely, low liquidity means fewer participants and more significant price fluctuations for buying or selling the same volume of assets.
Liquidity is crucial for the efficient functioning of the cryptocurrency market as it affects trading speed, pricing, and the ability to enter or exit positions. Factors influencing market liquidity include the number of active traders, exchange volume, and the availability of trading pairs.
Who is a Crypto Market Maker?
Insufficient trading volume and a low number of active traders result in low liquidity levels. Crypto exchanges (especially institutional ones) often use the services of market makers to solve this problem. These market actors help maintain a high liquidity level or even create liquidity and trading volume for new tokens. In return, they profit from bid-ask spreads and pay lower fees.
Large exchanges often stimulate market makers with fee discounts or even zero trading fees. For example, crypto market-making services on WhiteBIT exchange include low fees and rebates for market makers.
Market makers are specialized companies, financial entities, or high-frequency traders that partner with crypto exchanges and ensure sufficient trading volume for their trading platforms. They open new trading orders on exchanges and stand ready to execute them at any given time and under all market conditions.
Market makers buy assets from a seller at a bid (buy) price and sell assets to buyers at an ask (sell) price. The price difference (spread) becomes a market maker’s profit.
The Role of Market Maker
Crypto market makers are important in ensuring liquidity and stability within cryptocurrency markets. Their main roles include:
● Providing market liquidity. Market makers continuously buy and sell cryptocurrencies, adding depth to the order books. This activity ensures traders can execute their trades efficiently without significant delays or price impacts.
● Reducing spread. By placing buy and sell orders close to the market price, market makers help narrow the spread, reducing trading costs for other traders.
● Price formation. Through their constant trading, market makers help establish fair market prices for cryptocurrencies by balancing supply and demand.
● Supporting new assets. For new tokens, market makers can play a crucial role in establishing initial liquidity, enabling these new assets to be traded more easily from their inception.
Overall, crypto market makers contribute to a more robust, efficient, and user-friendly trading environment, benefiting all market participants.
