An independent examiner has revealed shocking details surrounding the inner workings of Celsius – a crypto lender that filed for bankruptcy in July 2022. The examiner claimed that Celsius did not operate by the business model that it presented to customers. He likened it to a Ponzi scheme, much like FTX – a company that happened to have used the same accounting software: QuickBooks. The Truth About CEL Token Per a filing from examiner Shoba Pillay on Tuesday, Celsius had…
What are Crypto Market Makers?
A market maker in the cryptocurrency market is a trader or a firm that provides liquidity to the market by placing both buy and sell orders on a trading platform. This allows other traders to buy and sell at a consistent price, even when there is little trading activity in the market. Market makers help to reduce volatility and make it easier for traders to execute trades at the desired prices.
An example of a practical application of a crypto market maker:
A market maker sees that the price of Bitcoin on a particular exchange is $10,000 and wants to provide liquidity to the market. Therefore, they will place a buy order at $9,950 and a sell order at $10,050. Now, when other traders want to buy Bitcoin at or around $10,000, they can do so because the market maker has placed a buy order at that price. Similarly, when other traders want to sell Bitcoin at or around $10,000, they can do so because the market maker has placed a sell order at that price.
Crypto Market Makers Benefits
There are several benefits of market makers in the cryptocurrency market:
- Liquidity: Market makers provide liquidity to the market by placing both buy and sell orders. This allows other traders to buy and sell at a consistent price, even when there is little trading activity in the market.
- Price stability: Market makers help reduce market volatility by placing orders that smooth out price fluctuations. This makes it easier for traders to execute trades at the desired prices.
- Increased trading volume: Market makers help to increase trading volume by providing liquidity to the market. This can lead to more trading opportunities and a more active market.
- Reduced slippage: Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. Market makers can reduce slippage by providing liquidity at multiple price levels, making it easier for traders to execute trades at the desired prices.
- Better execution: By providing liquidity, market makers make it easier for traders to execute trades quickly and at the desired prices, resulting in better trade execution.
- Reduced spreads: Market makers help to reduce the spread between the bid and ask prices by providing liquidity at multiple price levels. This can make it cheaper for traders to buy and sell cryptocurrencies.
Crypto Market Makers Drawbacks
While market makers can provide many benefits to the cryptocurrency market, there are also some drawbacks to consider:
- Risk: Market makers take on risk by placing both buy and sell orders in the market. They may incur losses if the market moves against them or cannot execute trades at the desired prices.
- Conflicts of interest: Market makers may have conflicts of interest with other traders, as they may try to manipulate prices for their benefit.
- Lack of transparency: Some market makers operate in a non-transparent manner, which can lead to trust and certainty among traders.
- Unfair competition: Market makers have an information advantage over other traders; they may have access to information unavailable to other traders. This can lead to an unfair advantage.
- Dependence on market makers: Market makers provide liquidity to the market, but if they are present and able to provide liquidity, it can lead to decreased trading activity, wider spreads, and greater volatility.
- Regulatory concerns: Market-making activities are subject to regulations, and market makers must comply with various rules and laws. Due to the decentralized nature of the crypto market, it can be challenging to regulate market makers’ activities. Hence, it can be a concern for traders.