Token market making is an essential component of any crypto project, whether you’re launching an ICO or creating a token-based platform. It helps bring buyers and sellers together on a single platform, facilitating trading between various types of digital assets.
Liquidity – It’s important for token projects to have enough liquidity in the marketplace. This allows them to sell tokens in a timely manner without impacting their price significantly.
Having a liquid token is essential to the success of any crypto project, as it will attract many traders and increase its value. In order to achieve this, token projects must partner with a liquidity provider and hire a market maker.
A market maker is a person or firm that trades in a particular asset, often at a profit. They act as an intermediary between a buyer and a seller, quoting the price of the asset. Their trading activity creates liquidity, lowering the price impact of larger trades.
Hiring a Crypto Market Maker – It’s crucial for token projects to work with a liquidity partner that has the technical expertise and experience to fuel their growth. The best market makers have bespoke technology solutions, algorithm development teams, and risk management policies in place.
These market makers have been in the industry for years and have extensive knowledge of all aspects of the blockchain space, including market microstructure. They can also help you find the right hedging methods for your token.
Ramping – A common tactic that market makers use to increase their profits is ramping, which involves creating an impression of a big buyer and engaging in a series of large market offers within a short period of time. This may be done on a daily basis and will make the market accustomed to this behaviour, driving up prices in the process.
The downside to this practice is that the big buyer will disappear, resulting in a massive loss for those who were unable to “front-run” them and win the trade. It’s also an easy trap to fall into, as other unsuspecting traders are compelled to try and get in on the action.
Another popular way of manipulating prices is to use arbitrageurs, who buy and sell a set number of tokens on different exchanges at varying rates. This is ideal for token projects that are looking to improve their profitability, as it can help to eliminate market inefficiencies and allow them to gain more money than they could in a spot market.
Hedging – The use of hedging strategies is a necessary step for any market maker, and can be used by both traditional and crypto market makers. Hedging strategies are designed to help mitigate risks in the market, such as a rise in volatility or a decrease in liquidity.
Market Cap – The market cap of a token shows the amount of funds that have been invested in the token. This can be a good indicator of the token’s future potential.