How does a crypto market making bot work?

How Does A Crypto Market Making Bot Work?

The concept of a crypto market making bot to automate trading has been around for a long time. While most people have heard of “bots” trading on exchanges, few understand how they work. Our illuminating guide presents elaborate information on crypto market making bots and the need for token projects and cryptocurrencies to embrace it.

In recent years, orientation towards crypto trading has increased by leaps and bounds. This has opened up more avenues for traders to delve into understanding how they can yield maximum profits.

What is a spread?

The spread is the difference between the buy and sell prices for any given asset. Like in the financial markets, when a position is opened on a cryptocurrency market, there is a representation of two prices. If you want to initiate a long position, you trade at the buy price which is slightly higher than the market price. If you want to open a short position, you trade at sell price which is a little below the market price. In reality, there is not one single price but two different prices:

The BID price -

represents the threshold amount that traders on the exchange are willing to pay for the asset

The ASK price -

it is the minimum amount anyone would sell the asset on the exchange.

The size of the spread is the result of the market demand and right now at the time of writing the market is flooded by new traders sitting at home during the pandemic.

What is a Crypto Market Making bot?

A Crypto Market Making Bot is an automated computer program that executes buy and sell orders of cryptocurrencies without the need for human intervention. Irrespective of the programming language and framework, the primary objective for a crypto market making bot is to generate as much profit as possible by executing orders driven by a set of predetermined rules and factors.

A benefit of a crypto market making bot is that it is void of emotion. This can be a determining factor in a human trader making errors along with stress or fatigue. Again, it’s primary objective is to generate the most profit possible in the shortest period of time by trading the spread.

How does it work?

A crypto market making bot assures a tighter spread for a particular token creating liquidity for traders. The bot ensures that the traders do not have to wait for long to find buyers or sellers making the price of the coin susceptible to market volatility.

Crypto Market Making Strategies

Market making is a trading strategy that allows traders to make money by providing liquidity for other traders.

How?

By generating limit orders in both the directions considering the bid-ask spread as the profit margin. To further understand this, it is imperative we understand the concept of a maker order and a taker order.

Maker orders are more often profitable because they facilitate more liquidity into the market expanding options for others to buy and sell. Market takers generally have a sense of urgency and are willing to sacrifice rates for the immediacy the market maker provides. Most of the cryptocurrency exchanges do not charge very low fees or even rebates on maker orders because they encourage liquidity. On the other hand, they charge higher fees on taker orders.

The profits you earn on the spread will then be a result of the spread in the transaction, multiplied by the trading volume. The higher the spread, the bigger the profit.

Should You Work With A Market Maker?

Maintaining spreads is easier said than done. In theory, all of the information mention above sounds logical and futile but in practice it is much more complex. In between checking the bid price and submitting the order, the bid price will fluctuate wildly within the scope of milliseconds when it is in high demand. In addition to that, a badly programmed algorithm with little built-in risk management can turn your profits into large losses quickly.

Without market makers, the spread on some smaller trading pairs can become unmanageable, which will affect the demand for your token. The market makers and trading bots keep a tight spread, and a healthy order book depth which makes the token attractive to potential traders and investors.