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Even highly liquid markets experience high volatility. Crypto market making for token projects is, therefore, an essential element for crypto token projects.
This article will walk you through what things to keep an eye on when figuring out the optimal crypto market making setup developed by us at Autowhale.
We’ve been a strong partner for clients in the crypto space. Some projects they have supported are token projects, including Presearch, Locktrip, or Blackhat.
1. Why market making is a crucial element for token projects
The list below describes the most important points when applying market-making strategies on token markets:
2. Offsetting Risks and the Alameda/FTX debacle
Offsetting risks is a key part of crypto market making for token projects. They need to be aware of how to manage the inventory of their tokens and be responsibly exposed to the volatility of their asset(s).
Increased liquidity
By providing liquidity on a crypto exchange, market makers can help to maintain a tight bid-ask spread (i.E. the difference between the price at which an asset can be bought and sold) which makes it easier for market participants to buy and sell an asset. Increased liquidity can also help to reduce the volatility of the token price.
Managing order flow
Market makers can also manage the flow of orders for a token by using algorithms to automatically buy and sell the token at predetermined prices based on predetermined criteria such as trading volume and price. This can help to smooth out the price movements of the token and reduce volatility. Market making algorithms can manage order flows by supplying liquidity to key price levels. It is essential to distinguish between placing limit orders (liquidity) at important price levels and paying for order flow or having some backdoor to an exchange to frontrun certain orders. Of course, the latter is highly unethical, if not illegal, and should be avoided by token projects.
Offsetting risk
Market makers can offset the risk of their positions by using various hedging techniques, such as futures contracts or options, to mitigate the impact of price movements on their positions. More on that later in the article.
Enhanced price discovery
Crypto market making for token projects can also help to improve the accuracy of price discovery or the process of determining the fair value of an asset. By applying market-making strategies, crypto market makers can provide information about the supply and demand for the asset, which can help to inform the market about the asset's value.
Some crypto market makers, such as Alameda, allegedly were set up in a way that token projects provided them with tokens that did not have lockups. In such a setup, token projects are, on the one hand, at the mercy of the crypto market maker to not dump their markets (therefore decreasing the overall inventory of the token project if risks are not offset correctly), and on the other hand, the incentives are not aligned.
Token projects should hire a market maker that operates in their (selfish) interest.
Crypto market makers like Autowhale work instead on a fixed price set up than taking a cut of the token supply.
3. Crypto market making for token projects - Strategies
There are various market making strategies token projects can apply for crypto market making, depending on their goals and the characteristics of their token.
Here are a few examples of how strategies can be applied in crypto market making for token projects:
- Simple market making: Simple market making involves continuously buying and selling the token at a fixed spread, or the difference between the buying and selling prices. This strategy can help to provide liquidity to the market and reduce the bid-ask spread, but it may be less effective in volatile markets.
- Adaptive market making: Adaptive market making involves using algorithms to automatically adjust the market maker's buying and selling prices based on market conditions, such as volume and price movements. This can help to maximize liquidity and reduce risk in changing market conditions.
- Dynamic market making: Dynamic market making involves using algorithms - may they are based on statistical/quantitative models or machine learning based - to continuously optimize the market maker's position based on various factors, such as market conditions, order flow, and risk. This can help to maximize liquidity and reduce risk in changing market conditions.
- Delta neutral market making: Delta neutral market making involves buying and selling the token so that the market maker's overall delta, or the sensitivity of the market maker's position to price movements, is zero. This can help to reduce the impact of price movements on the market maker's position and minimize risk. Regarding delta-neutral market-making for token projects, it is vital to consider the availability of derivatives of the respective token. If there are no derivatives, a crypto market-making firm may consider finding a basket of other derivatives – with a strong correlation to the tokens price - that may be used as a hedge for the token’s market.
Often a combination of various algorithms is needed to support token projects to achieve their market-making goals ideally.
Other strategies, such as arbitrage trading strategies, may need to be considered - especially when looking to make markets across multiple venues, including decentralized exchanges.
Ultimately the choice when it comes to crypto market making for token projects is to be determined on a case-by-case basis depending on the specific requirements of their business and the characteristics of their token.
How We Do Market Making for Token Projects
We’ve tailored our solution to meet clients’ needs at scale – whether a token project is only getting started (by having their first secondary market listing) or is already established across multiple venues. Token projects don’t even need specialized expertise or infrastructure.
- Clients, from token projects to exchanges or funds working with Autowhale, start the onboarding by providing the required documents and contracts.
- After figuring out the right setup (see “Offsetting Risks and the Alameda/FTX debacle”), the clients provide us with the required API keys for connecting to their exchange accounts.
- For security and OPSec’s sake: We use the Principle of Least Privilege (PoLP) when it comes to API Keys. That means only what is needed is enabled by the client when configuring an API key.
- Together with secure, encrypted storage of the API keys, we help keep confidential data as secure as possible.
- Clients use our crypto market-making software to benefit from increased liquidity, enhanced price discovery, and more stable and liquid markets for their tokens.
Be careful while sharing API keys!! Avoid granting withdrawal rights whenever possible. Trusted crypto market-making firms would never ask for such rights unless needed.
In light of the 3commas hack, API keys need to be treated responsibly and at no time be stored in plain text.
Frequently Ask Questions:
What is market making for crypto tokens?
Market making for crypto tokens involves a firm or individual continuously buying and selling a particular cryptocurrency on an exchange, providing liquidity and reducing price volatility. Market makers quote both a buy price (bid) and a sell price (ask) for a particular crypto token. They aim to profit from the spread between the bid and the ask prices. Market makers play a critical role in ensuring that markets operate efficiently.
Is crypto market making profitable?
Yes, crypto market making can be profitable. Like any trading activity, profitability largely depends on the strategies used, market conditions, the depth and liquidity of the markets you're participating in, and the ability to manage risk effectively. It should be noted that it also involves significant risk and capital investment.
Does crypto have a market maker?
Yes, there are many market makers in the cryptocurrency space. Market makers are typically firms or individuals that quote both a buy and a sell price in a financial instrument or commodity, hoping to make a profit on the bid-offer spread. They help to provide liquidity to markets, including cryptocurrency exchanges.
How to do crypto market making?
To engage in crypto market making, one needs to follow several steps:
a. Capital: Ensure you have enough capital to buy and sell crypto tokens regularly, as market makers need to be consistently present in the market.
b. Exchange: Identify a cryptocurrency exchange that supports or encourages market-making activities.
c. Strategy: Develop or acquire a trading strategy that focuses on market making. This often involves algorithms or bots to automate trading activities.
d. Risk Management: Set up a robust risk management system to protect your capital from major market movements or unexpected events.
e. Compliance: Ensure you understand and comply with all relevant regulations, which can vary greatly by region.
Note that market making is a complex and high-risk activity, requiring in-depth knowledge of financial markets and the specific dynamics of crypto markets. Professional advice should be sought before engaging in these activities.
How do market makers work in crypto?
Market makers in crypto work by providing liquidity to the market. They do this by constantly offering to buy and sell cryptocurrencies. Market makers make money from the spread between the buying price (bid) and selling price (ask). Their continuous presence in the market reduces price volatility and improves the overall efficiency of the market. Market makers use algorithms or automated systems to manage their trading activities due to the fast-paced and around-the-clock nature of crypto markets.
Who are the biggest crypto market makers?
There are several big market makers in crypto, including Autowhale, Wintermute, Jump Trading, DRW, Cumberland, Pulsar Trading Cap, Blue Sky Capital Management, Alphatheta, and GSR Markets.
What is an example of a crypto market maker?
An example of a crypto market maker could be a company like Autowhale. They use algorithmic trading to provide liquidity for various cryptocurrency exchanges.
Learn more on Crypto Listing on Exchanges.
Find more content on algorithmic trading software, crypto market making, and market microstructure on our blog.
