Crypto Market Making Strategies

A Crypto Market Making Strategies component of a cryptocurrency project’s success, effective market making boosts trading experiences, minimizes volatility and builds trust between traders and projects. To do so, market makers continuously post buy and sell orders to create liquidity for a token’s markets. This allows trades to execute quickly and smoothly, and reduces the risk of price fluctuations that could deter investor participation.

Because they are constantly interacting with the market, market makers have to manage several complex challenges. For example, fast-changing prices and high levels of market volatility can cause a sudden shift in the bid-ask spread, which exposes them to potentially significant losses. To minimize this, they can use a strategy known as ‘bid-ask spread quoting’, which uses two-way quoting to capture profit in stable or low-volatility markets while narrowing the bid-ask spread and improving order book stability.

Market makers also need to manage their inventory to ensure they can continue to supply liquidity when prices are volatile. One way they do this is by skewing their quotes, which involves placing sell orders at a higher price than buy orders to signal inventory positions and attract more buys. However, over-skewing can lead to a high level of imbalance, which in turn reduces fill probability. To minimize this, they need to carefully monitor their positions and make adjustments in real time.

Securing Your Crypto Exchange: Best Practices for Safety

Another challenge for market makers is the need to comply with a variety of regulations, including those related to anti-money laundering (AML) and know-your-customer (KYC). To do this, they can use hedging and risk management strategies like delta-neutral hedging, which involves taking opposite positions in different markets to balance out any price changes.