Market-makers, or market-making services, have been around for a long time in the world of traditional finance. Naturally, when the crypto industry started to emerge, it wasn’t long before some of them joined up, seeking new clients and opportunities.
However, even though market makers have been around for a long time, they only recently received the recognition they were owed.
After all, market-makers’ importance is undeniable in the modern financial world. They bring structure and flow to the trading activity, and their efforts are crucial for maintaining high liquidity for assets that are not as well-known or popular as the financial markets’ top performers.
What Are Market-Makers and What Do They Do?
As mentioned, market-makers are services that can be hired to provide liquidity and quote bid and ask prices for exchange-listed assets. By doing so, they reveal which prices are they ready to buy or sell at, which facilitates price discovery and liquid trading.
Jens Willemen, the co-founder and managing partner at a market-making company called Kairon Labs spoke about it in a recent interview, trying to clear out any misconceptions.
He said, “Market-making is all about consistently quoting prices on both sides of the order book to create liquidity. Market-makers do not trade directionally and thus don’t care in which way the market is going. For a market-maker, profit is derived from covering the spread. Market manipulation is directional because it implies that the price of an asset is manipulated up or down.”
As such, market-making can be a driving force for some altcoins, which do not enjoy Bitcoin’s reputation and popularity. This makes market-makers crucial, even though the entry barrier in the crypto markets is not as high as it is in traditional ones.
Market-Making vs. Market Manipulating: What is the Difference?
As most people know, the crypto industry is still largely unregulated, which is one of its largest problems at the time. The lack of regulations makes it riskier and less safe than it would otherwise be. Any service dealing with crypto is left to self-regulate and ensure the best protection that it can offer.
However, such inconsistencies are preventing institutional investors from massively adopting the coins. At the same time, cryptos remain extremely volatile, and this could lead to the coins’ prices being different on every exchange, which would be terrible for the crypto industry as a whole.
With market-makers listing their own buy and sell prices, the prices are a lot more similar between exchanges, which helps nurture a healthy crypto industry.
Of course, this doesn’t mean that they are manipulating the market in a traditional sense of the word. Market makers do not care whether the price goes up or down — they will move with the market. What they do care about is keeping stability between buying and selling prices and using several different strategies for increasing liquidity naturally.
Market manipulators, on the other hand, use pump-and-dump and similar schemes to temporarily inflate the market just so they could make a profit before the prices crash. This is not helpful to the crypto industry — it’s quite the opposite.
This is why it is important to differentiate the two and not mix them up. Market-makers bring several benefits, including increasing market depth, keeping spreads under control, and more.
Market-making is a very healthy practice that helps keep the crypto and traditional financial industries liquid and alive. While there are plenty of misconceptions about it, it is important to know that this is a legal, positive practice.
It differs from market manipulation, and it doesn’t care which way the price goes, as long as the movement is natural and healthy.
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