The world of cryptocurrency trading is a dynamic and changing space where two key players, referred to as market makers and takers facilitate the buying and selling digital assets. Their activities directly influence liquidity, pricing stability, and overall market health.
Understanding the distinction between these two types of participants is important for anyone involved in crypto trading. This article aims to explain the roles of market makers and takers, explore how their actions affect trading fees, and discuss the risks both face in the crypto market. Letโs begin with what is a market maker?
Who are Market Makers?
Market makers are entities or individuals that contribute to the liquidity and depth of the cryptocurrency market. They achieve this by consistently placing buy and sell orders in the order book of a market-maker crypto exchange. Their primary function is to “make” the market by providing a continuous flow of buy and sell orders, thereby enabling traders to execute transactions without significant delays.
For instance, considering Ethereum’s price at $3,880, a crypto market maker would act as follows:
- Quoting prices. The market maker quotes two prices for ETH: a buy (bid) price and a sell (ask) price in anย order book. For example, they might set the bid price at $3,865 (the price they’re willing to buy ETH for) and the ask price at $3,875 (the price they’re willing to sell ETH for).
- Providing liquidity. By doing this, the market maker ensures that there is always a price at which you can buy or sell ETH instantly, which is crucial for a liquid market. It helps traders and investors execute their trades without waiting for another party willing to take the opposite side of their trade at their desired price.
- Earning the spread. The difference between the buy and sell prices ($3,875 – $3,865 = $10) is known as the “spread.” This spread is where the market maker earns. Whenever traders buy from or sell to the market maker, the market maker earns this spread. The goal is to make small profits on a large number of trades, which adds up over time.
Besides cooperating with crypto platforms, market makers also work with young crypto projects. They help boost their asset’s liquidity and prepare for listing token on exchange like WhiteBIT. Hiring crypto market makers for token listings on large and reputable exchanges is important for ensuring liquidity and price stability, which are key to attracting investors. Market makers facilitate smoother transactions by constantly providing buy and sell orders. It helps prevent extreme price volatility that can deter potential buyers.
Additionally, their role is crucial in meeting the liquidity requirements set by exchanges, enhancing the token’s market perception as legitimate and viable. The presence of market makers can significantly boost investor confidence, making the token more appealing and facilitating a successful listing.
Who are Market Takers?
Market takers in crypto are those participants who take liquidity away from the order book by fulfilling orders previously placed by market makers. When a trader wishes to buy or sell a cryptocurrency immediately at the best available price, they place a market order, which is executed against the limit orders set by market makers.
For example, if a market maker has set a bid price for Ethereum at $3,865 and an ask price at $3,875, a market taker will buy ETH at the $3,875 ask price if they want to purchase immediately or sell at the $3,865 bid price if they wish to sell right away.
Maker vs Taker Fees
Cryptocurrency exchanges have different approaches to makers and takers through fee structures, primarily because their impacts on market liquidity differ. Market makers, who add liquidity to the market, are often incentivized with lower trading fees or even zero fees and rebates. This is because their activities facilitate a smoother trading experience for everyone on the platform. Conversely, takers, due to their role in removing liquidity, typically pay higher fees.
Possible Risks for Makers and Takers
While participating in the crypto market can be lucrative, both makers and takers face challenges and risks. Market makers, for example, risk being caught on the wrong side of a rapid price movement, which can lead to substantial losses, especially in volatile markets. They must also manage their inventory effectively to avoid taking undesirable positions on a market maker platform.
Market takers, on the other hand, might experience slippage (executing an order at a less favorable price than expected) in volatile markets or when dealing with large orders in relatively illiquid assets.
The dynamic between crypto maker vs taker is fundamental to the functioning of cryptocurrency markets. Market makers provide the necessary liquidity and order book depth for efficient trading, while takers facilitate market movement by executing trades against available orders.
