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The cryptocurrency market may be very young compared to their older financial brothers. However, the crypto markets are growing very rapidly. Below you can see how fast the markets have grown in a year, and compare that to today. The current total market cap as of April 2018, is $274,923,323,798 USD.
Due to this rapid growth, there are currently more than 6,000 ICOs running; and this number is only from what is counted on ICO websites. However, it will never be possible for all of those projects to be listed on exchanges.
Want To Get Listed On An Exchange? Marketing, Advertisement, Community and Market Making Will Get You There
Let’s do an example to clarify things: We will assume 300,000 USD volume per day is the absolute minimum volume a token should have. In reality, big traders and investors would not get involved in tokens with a volume lower than 1 million, but let’s use 300,000 USD for the example anyway.
If there are 6,000 new tokens hitting the markets in the near future, that means there must be 300,000 x 6,000 = 1,800,000,000 USD worth of volume available in the market to make these tokens tradable in a healthy environment.
This is literally impossible to accomplish without the projects themselves leaving a good budget to provide this volume as a service to their investors through market making. It would be crazy for anyone to believe these volumes can be reached without a sound market making policy.
Furthermore, projects also need to realize market making without a strong community/social presence is useless. Without a big community to support you, where will the investors come from? Market making helps investors and traders reduce their risk and increase the potential gains when trading your token. It won’t create the investors for your project.
Marketing, advertising and community management are as important as market making when trying to build your project up and make it an asset exchange platforms want to list.
Exchanges are spending more time regulating which coins become tradable, and prefer that new listings have strong communities, are smart with their marketing and employ market makers on their projects.
If an exchange were to list 6,000+ tokens without thorough screening, and no use of market making, none of them will have enough volume for traders/investors to buy or sell their tokens.
In the near future, it will be impossible for any token or crypto project to get listed on any respectable exchange without being able to provide the liquidity, stable spread and order matching services market making offers.
Don’t forget, exchanges must remain loyal to their users (investors and traders), and providing tokens with a healthy volume is key to keeping these users satisfied by minimizing the risk they take by investing in cryptocurrencies.
Now that we got that out of the way, let’s dig deeper into all the advantages a market maker offers to investors…
What Is A Market Maker:
There is a lot of confusion as to what a market maker really is. Many people and ‘experts’ in the cryptocurrency industry still don’t understand that market making is a service for investors, not a price-manipulation technique.
Market makers are those who allow the market to happen. They eliminate the delays that traders may experience in order fulfillment and provide the necessary liquidity that investors need in order to be able to enter a trade (or leave it for that matter) without affecting the overall price so much.
As a simple example, let’s say your favorite crypto drops in price 20% and you judge this to be the ideal price to get into the trade. If you have 10 ethereum to invest, and there is no volume on the exchange that you are trying to buy the token at, you will basically eat through half the order book before buying your 10 ETH worth of tokens. So, you would single-handedly affect the price of the entire token and, you won’t be able to get in at the price you wanted. Worst of all, before you are done buying in, other traders will try to dump their tokens on you since you are the only user providing some sort of liquidity.
With the service of a market maker however, you will be able to buy all 10 ETH worth of tokens without affecting the price of said token because the market maker is providing the liquidity for it. (i.e the market maker is selling 10 ETH worth of tokens at the right price to you.)
In short, with this service the investor is happy, the exchange is happy and the project is happy. This is because investors are content with the trading environment. It’s a win/win situation for all parties involved , which again, really shows how little most crypto companies understand about market making and the advantages it provides.
Furthermore, ( I think they do this out of sheer ignorance and laziness to conduct one simple google search) many people in the crypto industry believe that market making is ethically wrong. This is just not correct, market making is a common practice in all financial markets. Here’s a simple description taken from investopedia.com about what is a market maker’s function:
“Market making enables the smooth flow of financial markets. Without this, investors and traders would not be able to buy and sell as easily. Less transactions in a market naturally translates to less investing, overall. Investing less would reduce funds available to companies and tend to decrease prices of shares of smaller companies without as wide a base of investors.
Exchange rules often have more than one category of market maker. Within the rules, a market maker firm can decide to commit to more responsibility for the smooth market performance of the specific securities in which it agrees to make a market. The market maker’s commitments include continuously quoting prices at which it will buy or bid, and sell or ask for securities. Market makers also have to quote the volume in which it is willing to trade and the frequency of time it will quote at the Best Bid and Best Offer (BBO) prices, and how it will do all of the above during all kinds of market hours and conditions. When markets become erratic or volatile, market makers need to keep a cool head to facilitate smooth transactions.”
Now, let’s dive a bit deeper in to all the advantages market makers provide, and the reasons why it should be a basic service that all cryptoprojects need to provide to investors before listing onto an exchange.
Here’s A Very Informative Video Of Market Maker’s Functions In The Financial Industry:
Advantages Provided By Market Makers:
Provision of Liquidity
The main objective of a market maker is to provide liquidity for investors and traders.
Liquidity describes the degree to which an asset or security (cryptos in our case) can be quickly bought or sold in the market without affecting the asset’s price.
I don’t think we need to go any further explaining why this is important. A successful trader will never invest in a low volume token because he has no way to buy large amounts of tokens without altering the overall price of the asset. The same goes when attempting to leave a position. Any trader with large amounts of tokens will not be able to leave the trade as there are no buyers at his prefered price.
Market making then becomes essential when attracting investors and traders, because market makers are there to bridge the liquidity gap.
Matching of Orders
The process of ordering when it comes to trading may be a zero-sum game. This means that the sellers get matched to the buyers and vice versa.
The market maker will search the market for sellers and buyers of a particular currency pair, at specific volumes so they can match these orders in the same currency and the same amount.
There may be particular times when it is difficult to get the exact match of the trader’s order. Here is where the market makers may step in to act as the seller or buyer of last resort. Market makers are there to help eliminate the delays that traders may experience in order fulfillment.
For a serious investor, being able to liquidate a position he has in a token/tradable good is of uttermost importance.
Crypto’s are, by default, a seriously risky investment. if a token does not have the volume to provide acceptable liquidity to investors, there is absolutely no reason for large and respectable traders to ever consider risking their funds by investing in a low volume token.
Stabilization of Spreads
The spread is the difference between the bid and ask prices, for a healthy trading environment you want this difference (the spread) to be as small as possible so that the overall price of the token/tradable good does not drastically change over a single trade.
If there is no influence of market makers that will stabilize the spreads through the liquidity maintenance, it may become difficult for the ranges to become fixed and low. Therefore, the influence of market makers will result in cost savings for small investors whenever they execute trades. Aside from that, it may also provide better entry points for the small investors.
Conclusion As To Why All Crypto Projects Should Consider Market Making As A Service To Their Investors
To summarize, market making is a very valuable tool in the trading world, whether it be the older established stock markets, or the new world of cryptocurrencies. If you run an ICO, you should be prepared to set aside a budget to pay for market making. In many cases market making can help to make profits, but more importantly it helps ensure that liquidity will be there for the token and your investors.
Again, any new token/project should be aware that they this is a valuable asset to their company and investors, they should be prepared to pay for this service before seeking a listing onto an exchange.
We have already seen more and more exchanges pushing market making onto projects, which is a good move since it protects future investors in a very risky environment. This trend will continue in the future so all crypto projects should be very aware of it.
