What is Market Making and how can anyone do it

image.png

A few days ago, a new user joined HIVE.

It's @hummingbot. It's a free, open-source robot, created by the company named CoinAlpha, that allow anyone to be a market maker on most of the major cryptocurrency exchanges.

If you at some point of your life got involved with financial markets, even if for a brief moment, you probably heard about Market Makers.

So, as a @hummingbot user, and as a trader, i want to talk more about market makers, how they make money, and what is their function on financial markets

And even if you don't want to be a market maker yourself, knowing who they are and what they do is a really important knowledge to have, when dealing with financial markets.

What is a Market Maker?

On any open market, where assets are freely traded between parties, market makers fulfill an really important role: Provide liquidity to the market

But what exactly is liquidity?

We could say that liquidity is a measure of how fast you are able to buy or sell an asset.

For example, if you want to sell a house, you won't be able to do it fast (even if you sell it for a price that is below the market average), because there isn't a lot of people buying houses on a daily basis. There is a small number of buyers and sellers on the housing market.

This means that a house is a low liquidity asset.

On the other hand, if you want to buy or sell Bitcoin, you can do it pretty much instantly for the market price, because there is millions of people buying and selling Bitcoin every day.

This means that Bitcoin is a high liquidty asset.

But why is that?

Why is so easy to buy and sell a lot of financial assets, like cryptocurrency, options, stock shares, bonds, etc.?

The answer is simple: It is easy because Market Makers exist.

The Market Maker Job is to fill the market with both buy and sell orders, to create liquidity.

What Market Makers do, and how they make money

And of course, no one works for free, and the Market Makers need to be paid for the service he is providing.

And in theory, it is pretty simple how to do that:

  • Place one buy order below market price
  • Place one sell order above market price
  • Wait for both orders be filled
  • Profit!

And i say in theory, because as anything related to trading or dealing with financial markets, there are risks, so, before diving in this profitable business make sure you fully understand what are the risks involve.

But Market Makers the bad guys right?

That is an interesting question, because i see a lot of articles and videos around saying how Market Makers are bad, and how they manipulate the markets, and how evil they are.

That couldn't be less true.

Sure, there is probably some shady operations that some market makers do that are illegal and manipulative, but this is beyond the core role a market maker play on an open market.

Therefore, Market Makers are as evil as anyone else that participate on the markets: As long as they play by the rules, there is nothing illegal or manipulative on their operations.

But here comes the juicy part of this article...

How cryptocurrencies are allowing market making to be accessible to everyone

On the old days, where computers weren't the main tool to operate on financial markets, banks and other institutions acted as market makers by adding a lot of offers on the market during the day.

But as technology evolved, automated algorithm robots became the norm, and were quickly accepted among the Market Making companies as a more efficient way to do their job, because their orders could be moved around faster to adjust to the market changes.

But one thing remained to same: To be a Maker Maker you needed a lot of money, to invest in technology, and to build a big enough inventory of assets, and resources to make deals with suppliers to get a better profitability.

And again, Cryptocurrencies are changing this scenario.

As i already talked about on this article, cryptos are making restricted financial products more accessible to a greater share of the population.

You can go to any major exchange, and you will find it is possible to create buy and sell orders with less than 1 USD.

A project like @hummingbot (https://hummingbot.io/) is the proof of that paradigm change.

It's a free (no entry cost), open-source (inner workings fully auditable), and easy (kind of) way to be join the cryptocurrency markets as a market maker, and make your crypto holdings work for you.

All you need is some basic computer knowledge and some crypto.

(Remind: Market Making come with it's own risks, so be sure to understand what they are before doing it with real funds)

Cryptocurrency projects need liquidity on their tokens markets, and besides the free bot, @hummingbot also create liquidity campaigns among cryptocurrency project that reward anyone that act as a market makers on specific projects.

So, if you are looking for alternate ways to make your cryptocurrency work for you, be sure to check @hummingbot project.

See you soon!