Crypto Market Makers vs Market Takers — What They Are and How They Influence

Crypto market makers provide liquidity by placing buy and sell orders, while market takers seek immediate execution of their orders. Here’s how they interact with each other.

Feb 07, 2024
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What Are Market Makers Market Takers

Key Takeaways:

  • In the cryptocurrency market, market makers provide liquidity by placing buy and sell orders on the order book, profiting from bid-ask spreads. 
  • Market takers, in contrast, seek immediate execution by matching their trades with existing orders, often using market orders.
  • Market makers are often entities specialising in providing liquidity, such as trading firms or liquidity providers, and play a critical role in maintaining a liquid market, narrowing bid-ask spreads and creating continuous trading opportunities.
  • Market takers prioritise immediate execution and match their trades with existing orders on the order book. They often use market orders, accepting the prevailing market price, and may incur higher transaction fees compared to market makers.
  • While most regular market makers are institutional, individual crypto whales can act as market makers or takers at times due to the volume of their actions.

What Are Market Makers?

In the context of cryptocurrency markets, a market maker plays a similar role to that in traditional financial (TradFi) markets. A crypto market maker is an entity or individual that facilitates the trading of cryptocurrencies by providing liquidity to the market.  Market makers work closely with crypto exchanges to provide liquidity to the market and facilitate smooth trading.

The presence of market makers in crypto markets is crucial for the overall efficiency of the market. They help reduce bid-ask spreads, increase liquidity, and contribute to the smooth functioning of cryptocurrency exchanges.

Below are some of the key roles they fulfil:

Liquidity Provision

Like in traditional markets, crypto market makers provide liquidity by quoting both buy and sell prices for various cryptocurrencies. This helps ensure there is a continuous market for these assets, allowing traders to buy or sell them at any time.

Bid-Ask Spread

Market makers profit from the bid-ask spread, which is the difference between the buying (bid) and selling (ask) prices. They aim to buy at a lower price and sell at a higher price, capturing the spread as their profit.

Risk Management

Crypto market makers take on the risk of holding a certain amount of cryptocurrencies in their inventory. To manage this risk, they may employ various strategies, including hedging and using sophisticated trading algorithms.

Electronic Trading

Many crypto market makers operate electronically and use algorithmic trading strategies to adjust their quotes in real time based on market conditions. This helps them respond quickly to changes in supply and demand.

Exchange Relationships

Market makers often have close relationships with cryptocurrency exchanges. They may work directly with exchanges to provide liquidity to specific trading pairs, and some exchanges even offer incentive programmes to encourage market makers to participate in their markets.

The collaboration between market makers and crypto exchanges is mutually beneficial. Market makers enhance liquidity on the exchange, making it more attractive to traders, while exchanges benefit from increased trading activity and a more efficient market.

Arbitrage Opportunities

Market makers in crypto markets may also engage in arbitrage opportunities, taking advantage of price differences between different exchanges or trading pairs.

Regulatory Compliance

Crypto market makers are subject to regulatory considerations, and their activities may be regulated depending on jurisdiction. Compliance with relevant regulations is essential to ensure fair and transparent trading practices.

What Are Market Takers?

A market taker is an individual or entity that places an order that matches an existing order on the order book. Unlike market makers, who provide liquidity by placing orders on the order book, market takers ‘take’ liquidity by executing trades against existing orders.

Market takers enter the market with the intention of immediately executing trades. Instead of placing orders on the order book, they match their trades with existing orders placed by market makers or other market participants.

Market takers often use market orders, which are instructions to buy or sell an asset at the best available price in the market. Market orders are executed at the prevailing market prices, and they ensure a quick execution but do not guarantee a specific price. 

Immediate Trades Over Best Price

In seeking rapid execution of their trades, market takers are willing to accept the current market price in exchange for immediacy, and their trades are filled based on the existing liquidity in the order book.

On many cryptocurrency exchanges, market takers are charged a transaction fee for their trades. This fee is typically higher than the fee charged to market makers. The rationale is that market takers are consuming liquidity from the order book rather than providing it.

In general, market takers react to the current market conditions and prices. They do not wait for their orders to be matched; instead, they take advantage of existing liquidity in the market. Since market takers are executing trades at the best available market price, they do not contribute to the bid-ask spread. Market makers, on the other hand, profit from the bid-ask spread.

How They Influence the Market

Large market taker orders can have an impact on the market, especially if there is limited liquidity at the current price levels. This impact may result in price slippage, where the actual execution price differs from the expected price.

Traders can switch between being market makers and market takers based on their trading strategies and market conditions. Understanding the roles of market makers and takers is essential for comprehending the dynamics of liquidity and price discovery in a cryptocurrency market.

Are Crypto Whales Market Makers or Takers?

Crypto whales, which are individuals or entities holding significant amounts of cryptocurrency, can engage in various activities within the market, including both market making and market taking. 

However, it’s important to note that not all crypto whales are necessarily market makers, and the terms are not synonymous.

Crypto Whales as Market Makers

Some crypto whales may act as market makers by providing liquidity to the market. They can place buy and sell orders on the order book, creating a market for specific trading pairs. By doing so, they contribute to liquidity, narrow bid-ask spreads, and help ensure there are buyers and sellers in the market. Crypto whales with substantial holdings may have the capacity to influence market conditions.

Crypto Whales as Market Takers

On the other hand, crypto whales may also act as market takers. If they have a specific trading objective and wish to execute a large trade quickly, they may use market orders to match existing orders on the order book. This can result in immediate execution but may also lead to price slippage, especially if the order size is significant relative to the existing liquidity in the market.

How Whales Influence the Market

In practise, some large holders of cryptocurrency may engage in both market making and market taking, depending on their trading strategies, market conditions, and objectives. They may contribute to liquidity during certain periods and act as market takers when they need to execute trades swiftly.

Crypto whales, due to the size of their holdings, can have a notable impact on market dynamics. Their trading activities, whether as market makers or takers, may influence short-term price movements. This influence has led to the observation that the actions of large holders can sometimes be a key factor in market sentiment and volatility.

The actions of individual whales can vary widely. Some whales may be more focused on long-term holding and not actively engaged in trading, while others may be sophisticated traders employing various strategies.

Conclusion

Understanding the roles of market makers, takers, and crypto whales is fundamental to grasping the intricacies of the crypto market ecosystem. Market makers play a crucial role in providing liquidity by placing buy and sell orders on the order book, contributing to efficient price discovery. On the other hand, market takers seek immediate execution by matching their trades with existing orders, often using market orders.

Crypto whales, representing entities with significant holdings, can play a role in both market-making and market-taking activities, leveraging their large positions to influence market dynamics.

In the dynamic landscape of the cryptocurrency world, the actions of market participants, including both institutional market makers and influential individual whales, contribute to the overall liquidity, efficiency, and volatility of the market.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

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