A Comprehensive Guide to Crypto Market Makers: Liquidity, Profit Logic, and More

To help everyone better understand market makers in the crypto space, I’ve specially added this chart.

Simply put, market makers are the “super counterparty” and “liquidity engine” of the market.

They continuously quote buy and sell prices for assets and use their own funds to accept investors’ buy and sell orders at those prices, providing instant liquidity to the market.

It’s like offering a “backstop” service for a marketplace: ensuring that whenever you want to sell something, there’s always someone bidding to buy; whenever you want to buy, there’s always someone willing to sell. Without them, the market could easily face “liquidity drought” situations where you can’t buy when you want to buy, or can’t sell when you want to sell.

Many people ask, how do market makers operate and make profits?

The core business model of market makers can be summed up as “buy low, sell high, and earn the spread.”

Providing two-way quotes: They simultaneously place both buy and sell orders. For example, if a certain token is currently priced at $100, they may place a buy order at $99.5 and a sell order at $100.5. The $1 difference is the bid-ask spread, which is their main source of profit.

Managing order book depth: They don’t just place orders at a single price, but set large numbers of buy and sell orders at different price levels, thus increasing market depth and allowing large trades to be completed smoothly, avoiding sharp price swings.

Diversified profit sources: In addition to earning the spread, market makers’ income usually also includes:
- Exchange rebates: Since they provide liquidity, exchanges reward them with a portion of transaction fees as incentives.
- Service fees paid by project teams: Many new projects hire market makers when listing on exchanges to maintain their token’s liquidity and price stability.
- Arbitrage and high-frequency trading: Profiting from small price differences between markets or speed advantages.

This process is highly dependent on complex algorithms and trading bots to cope with the ever-changing market.

Why do markets and project teams need them?

The existence of market makers is vital to building a healthy, vibrant trading ecosystem:

For the market, especially in the highly volatile crypto space:
- Providing liquidity: Allowing you and me to trade at any time without having to wait endlessly for a counterparty.
- Smoothing volatility, stabilizing the market: Their two-way quotes and order book depth can absorb sudden buying and selling pressure, acting like “shock absorbers” to prevent sharp price swings caused by temporary supply and demand imbalances.

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