Cryptocurrency market makers, or MMMs, play a key role in the cryptocurrency market. They provide liquidity by filling order books with volume. These MMMs take a small amount of risk and compensate for it by making dozens of trades in both directions. These market makers are naturally present in high volume products, but less liquid ones usually require paid market makers. Below are some advantages of using a crypto market making strategy.
MMMs have an incentive to maximize their profits by boosting volume and minimizing risk. To increase liquidity, they may use price curves or liquidate their positions in a more active manner. Moreover, the spreads are usually low and they do not stray from the price curve. Cryptocurrency market making is a highly risky activity, and those who engage in this activity should be extremely cautious. There is no guarantee that they will profit from their efforts.
A market maker uses a source exchange market to create an order book in the target market. Similarly, the Order Back strategy behaves like a Copy strategy, but orders liquidity from the source exchange market. Typically, the Order Back strategy creates an order on the target market without a spread. If the Spread is set at a level higher than the exchange fee, a positive profit can be achieved. Meanwhile, the Fixed Price strategy creates an order book on a market without a source market.
Despite their popularity, cryptocurrency exchanges often operate in foreign jurisdictions, so market makers should be cautious about participating in them. In addition to that, most of these exchanges are not regulated. This makes it difficult to protect your funds from hacks and attacks. Furthermore, cryptocurrency is highly vulnerable to latency, a time lag between data transmission and a trader’s order. To reduce the latency, market makers should configure their servers to be near their cryptocurrency exchange. However, this practice is not available with every cryptocurrency exchange.