What is Market Making in Crypto? Complete Beginner's Guide

Imagine landing at an international airport and wanting to exchange dollars for euros. You don't have to wait around the terminal hoping to find another traveler holding euros who wants your exact amount of dollars.

Instead, you walk up to a currency exchange booth. The booth is always ready to buy your dollars or sell you euros instantly. They make a small profit on the difference between the buy and sell rate (the spread).

In cryptocurrency, a market maker plays this exact role for digital tokens on exchanges. They continuously place buy orders slightly below the market price and sell orders slightly above it, so any trader can buy or sell instantly.

• Liquidity: How effortlessly you can swap an asset into cash without changing the price.
• Bid-Ask Spread: The gap between the lowest ask price and highest bid price.
• Order Book Depth: The volume of resting orders waiting to buy or sell at various price levels.
• Slippage: The difference between the price you clicked to buy at and the price where the order actually filled.

Without active market making:

• Spreads blow out to 5% – 15%, making trading prohibitively expensive.
• A single $1,000 sell order can crash the token price by 20%.
• Potential investors leave the token for more liquid alternatives.
• Exchanges review low-volume pairs and initiate delisting procedures.