Nowadays, most people in the world know about Cryptocurrencies which basically you can put your money as an online asset. It is a very interesting topic to discuss and to know more about. And the number of Crypto is getting increased very quickly.
There is a term called “market maker” which is having a crucial role in increasing the accessibility and liquidity of the traders, investors, and participants in the market. What do accessibility and liquidity mean? Accessibility here describes the general ability of blockchain which is used by people. While liquidity is the ability of a currency to be converted into cash or to other coins. This is very important for all trading including cryptocurrency.
On this occasion, we are going to discuss the benefit of market making and what market making is. If you are curious about it, let’s dive deeper into it!
What Benefit Will You Get By Market Making?
There will be some benefits of market making that you will obtain while doing cryptocurrency trading.
- You can increase the liquidity. If the liquidity is high, it will be easier to buy and sell the currency in the market because the transaction will be quicker.
- You can reduce the price volatility. Volatility is often meant to amount of uncertainty or you can say the risk that you take in a security’s value.
- You can help with a balanced price. You may make the price at a stable level, not too low for the trading.
- You will get an efficient bid-ask. It is the amount in which the buying price exceeds the selling price in the market. In other words, it is the difference between the highest and lowest price which the investors wish to accept.
- You can reduce the slippage by trading under the fast-executing brokerage.
What Is Market Making?
Do you know what is market making in terms of cryptocurrency? Market making is created for traders to buy and sell crypto in large amounts. This will be needed to get access to an efficient market. The market maker just facilitates a tight market by posting tighter spreads. In a simple way, they just provide the availability of crypto assets.
Moreover, market makers are the companies that are employed to improve liquidity and trade volume. They could be also individual agents, however, they usually work in large numbers. Why is the market maker having a very crucial role? Because the goal of market makers is to keep the function of the market by infusing the liquidity.
In brief, market makers give facilitation a smoother flow to make investors and traders easy to buy and sell the assets. That is why, their existence is very crucial, without market making there will be fewer transactions and investment activities happen.
Market Maker Vs Market Takers
You need to know the terms of the market maker and the market taker because both are having very important roles in trading. Both of them work together to create trading in the market. The purpose of a market maker is to create a buy or sell order for the transaction. While the market taker is to fill and buy the order. Thus both parties have something that we call “an order book”.
Market makers are the ones who buy and sell an asset for themselves by creating an order book and also have the responsibility to provide liquidity toward the market space. Then, how do they earn profit? Their profit spreads along with asset bid and profit price because they hold a serious risk if the asset price is going down.
Moreover, market takers are the ones who take orders from the order book. They are also commonly known as liquidity takers in the trading space. And the investors expect that they will obtain the crypto asset to their account for either a short or long period of time.
Type Of Market Maker For Trading
We will discuss more about them and the difference between them There are two types of market maker trades, which are principal trading and agency trading. Crypto trading seems very simple as flipping your hand palm, but actually, it is so many complicated things happening behind the system.
- Principal Trading exists when a brokerage completes the investor’s trading by using their inventory. The brokerage also buys the security from the secondary market then they will hold it for a certain period of time and then sell them. This trading lets the brokers obtain profit from the transaction. The investors buy and sell their assets through brokerage which in this case will use its inventory to fill the order.
For instance, if you want to buy an asset at $200, the principal will check the inventory whether it is available or not to sell to you. If the asset is available, the principal will sell it to you and report all transactions to a certain exchange system. There is a term SEC (Securities and Exchange Commission) which has to ask the brokerage to complete the trading at comparable prices to those markets.
- Agency Trading is a method of transaction by executing the investor’s orders whether buying or selling the assets. It is a completely more complicated transaction than the principal trading. The agreement will involve the security for transferring assets between investors from different brokerages. If the number of investors is increasing, the agency will need extremely secure and accurate bookkeeping, clearing, and reconciliation to ensure all the transactions will run very smoothly.
The broker has to find the investors who will buy or sell the security asset for an equal price as the counterparty. This trading will need two different parties. Your brokerage needs to find a party that wishes to buy the asset that you agree on the same price and vice versa. Once, both parties agree, then the exchange will record the transaction on the system.
That is all about the market making and its benefit. You can dive deeper into this kind of discussion in some blockchain forums on the internet. Hope this information help!