Market making is one of the fundamental mechanisms supporting the crypto market. It boosts volumes, maintains price stability, attracts new traders, improves investor confidence, optimizes market efficiency, and is responsible for many other fundamental elements of crypto projects.
So we asked the Yellow Capital team and CEO Camille Meulien to help us get a better perspective on the crypto market-making business, its utility for blockchain projects, and why every token project must have a market maker.
“Cryptocurrency market makers are probably the most influential crypto market participants that no one is talking about, basically crypto éminence grise”
– Camille says.
Why is Liquidity Important?
For a trader, liquidity is the most important information about a specific market. A liquid market attracts traders because they can easily enter and exit the market, benefiting from price fluctuations, and with traders come trading volumes. Higher trading volumes bring more trust and market participants, which brings even higher trading volumes.
According to Yellow Capital, a cryptocurrency market maker’s job is to make liquidity work for the good of the token. If the crypto project feels that the market maker does not protect its interests and does not generate enough trading activity, it better exit the agreement.
What Do They Do?
Crypto market makers encourage trading volumes by providing liquidity (buy and sell order placements close to the mid-price), creating a healthy order book, and a liquid market. And a liquid market is what every crypto project needs to have for its token.
Camille Meulien reminds us that during the 2017 ICO boom, projects with active market makers enjoyed up to ten times the daily trading volumes compared to those without. This development is underpinned not only by the increase in trading volume but also by the intensity and attractiveness of the market.
Two main factors attract institutional and retail investors: liquidity and price stability prices. Ethereum is a great example. After crypto market makers lowered volatility by adding more liquidity, ETH received higher interest from institutions. The more institutional money inflows the market, the more retail investors and traders follow “smart money,” and the easier it gets to establish a token as a market leader and a benchmark for its category.
In this case, the involvement of market makers enables the execution of big trades with the most negligible negative impact on asset prices. For example, every time an investment fund builds a position in an existing token, market makers help ensure the trades are done smoothly, keeping the market stable and protecting it from great price movements.
Yellow Capital explains that attracting big money must happen without causing too much price movement on the market to retain the token’s stability and investors’ trust. Experienced market makers know exactly how to do that.
Market Makers offers a deep order book with numerous buy and sell orders at various price levels. The depth is critical for efficient trading, ensuring all customers have seamless trading experiences and protecting the market from large movements provoked by individual trades. Both factors are crucial for a crypto coin’s ecosystem and image.
As per Camille, CEO of Yellow Capital: “
The best market makers have proven formulas and algorithms for maintaining the order book depth. The volume of orders at a specific price range is predetermined, strongly controlled, and constantly monitored. So make sure your partner is one of the best!”
Market makers help maintain competitive bid-ask spreads, thus supporting traders by reducing transaction costs. Narrow spreads mean a healthy market with deep liquidity, eventually attracting more significant participation in general market activity and eventually bringing stability for a token.
Liquidity for newly launched tokens is a matter of life and death. If the token has sophisticated trading volumes, maintains a tight spread, and has a stable price, then it gains traction and increases awareness. And those are the factors that let you focus on building the product and running the business in the crypto market.
But even if you have a project with a market maker, it is better to review and align your interests. As Yellow Capital explains, some market makers focus on their business goals rather than the project’s future when getting inventory or a loan from the project.
Market makers, like Yellow Capital, are responsible for the price discovery of new tokens. They interact with buyers and sellers and provide liquidity at the right levels and times. Price discovery is vital for new tokens to gain some foothold in the market and attract investors.
Market makers ensure traders can buy and sell tokens freely without any difficulties, making everything feel simple. On centralized exchanges, market makers safeguard the process of trading flows smoothly to prevent the platform from having liquidity issues because orders are always available and executed flawlessly. So, the presence of market makers for CEXs is paramount to building and keeping users on the platform.
Market makers are crucial in mitigating slippage. They ensure that larger orders affect the price of an asset much less. Exchanges use market makers to lessen slippage and allow traders to make huge trades while maintaining a favourable price. Reduced slippage saves traders money and means the market can be predicted and relied upon.
The price and dynamic of a token publicly represent the success of the issuer’s project. This is why partnering with a solid market maker like Yellow Capital is crucial. Besides being crucial for the crypto market, most market makers are absolutely necessary to increase a token’s community and fanbase, keep the price stable, build trust in the project, and much more.
However, every crypto business must remember that not all market makers have the same agendas. Many prioritize their business interests and protect their revenue over win-win partnerships. After that type of partnership, all that is left are the founders’ broken dreams and angry investors.
That is why we recommend carefully choosing your partner and only dealing with trusted and proven market makers like Yellow Capital.
Yellow Capital has billions of USD in assets under management, a portfolio of highly notable clients, and a 10-year proven track record of making crypto founders’ dreams a reality.
Visit yellowcapital.com for more information, or follow Yellow Capital on X.com (Twitter).
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