Common misconceptions about crypto market making

Opening up a conversation on crypto market making is always a bit tricky. There seems to be a lot of misunderstanding and confusion out there as to what market making actually is, and why it certainly can be used to benefit the entire crypto ecosystem.

Wash trading means buying and selling your own orders, thus creating fake volume. This practice will have little positive impact on the organic volume of your token. Instead the market maker is continuously paying trading fees making this strategy expensive to run. Good market making algorithms put out orders that get bought up by other participants in the market, creating real organic volume.

  • “Market making is simply running a trading bot”

Every exchange and order book is different. A good market maker defines a custom trading strategy that is tailored to each specific trading pair. Some ERC20 tokens have a strong ETH trading pair with lots of volume, and a weak BTC trading pair that needs a different strategy.

  • “Market making is illegal, a project should not interfere with its secondary market”

Market making is being conducted in the highly regulated traditional markets as well. Reducing the spread and assisting in deepening the liquidity pool is not considered illegal in any market. Wash trading and other efforts to push the price up on the other hand, are illegal. We would argue it is the fiduciary responsibility of a project towards its token holders to have their best interests at heart by keeping the secondary market as healthy as possible.

  • “We are focused on building the product first, and will worry about the token later”

While this may seem like a logical approach to some, often the community starts falling apart because of a stale secondary market. Secondary market activity also contributes to the visibility and credibility of a project. The best technology does not always win the battle in the real world. Look at what happened to Betamax and VHS.

  • “Crypto market makers are extremely expensive”

During the bull market of 2017 a lot of market makers started popping up charging very high prices. We heard of prices ranging up to $75000 a month for these services. These market makers have little luck finding projects willing to pay these amounts during the current market conditions. Serious market makers require a significantly lower fee, and provide a profit split on any profits made during the market making.

  • “Market makers offer little transparency in their trading and require a huge amount of funds to be transferred to play around with at their own discretion”

The solution to this concern is simple. Ethically sound market makers are able to perform trading services by just having API access to an exchange account that stays in the hands of the project. Thus not requiring withdrawal access. This results in the fact that the project can see every trade happening in real time on their exchange account, creating total transparency.

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