When talking about cryptocurrencies, their cost is most often mentioned.. However, it is not generated randomly. Trading crypto assets is a complex process in which market makers and market takers play an important role.
Liquidity of cryptocurrencies
Liquidity is a property that characterizes the availability and ease of purchasing a particular cryptocurrency. When liquidity is high, there are a large number of players: makers and takers who are ready to participate in the process. This means that the difference between the purchase price and sale price, the so-called spread, is not very large. If liquidity is low, then any transaction can lead to a significant price jump. This is explained by the fact that the spread in such conditions is much larger. What factors influence liquidity?
What does liquidity depend on?
First, trading volume. It is nothing more than the total number of buy and sell transactions expressed in monetary terms (usually US dollars). Naturally, the trading volume of large cryptocurrencies, for example, Bitcoin, far exceeds that of MultiversX, which is conventionally 50th in terms of capitalization.
Actually, the second point follows from the first point – the popularity of digital assets. It's no secret that Bitcoin is the most popular cryptocurrency. Ether is second. And so on. Naturally, there will be greater demand for them, and it is with them that investors will be most active in conducting transactions.
Secondly, the number of exchanges. It is clear that the largest cryptocurrencies (top 10) are traded everywhere. But with coins that are smaller in terms of capitalization, difficulties may already arise: the platform for trading will have to be selected carefully, since the token you need is not available everywhere.
Thirdly, market depth. The indicator shows the number of orders (applications) for purchase and sale available at a particular point in time. The more there are, the higher the liquidity. Market makers and market takers are engaged in issuing and executing orders..
Who are market makers
Market makers (literally translated into Russian – those who make the market) are responsible for placing orders for purchase and sale.. As a rule, they use limit orders. Let's say the price of Bitcoin is $38,123. The market maker expects it to decrease slightly, say, to $38,000. He places a limit order to buy two BTC at $38,000. The order will be executed when Bitcoin reaches the specified price.
As can be seen from the example, a limit order assumes that you determine in advance how much cryptocurrency you will buy and at what price. Until it is executed, the order will simply remain in the order book.
Thus, by placing buy and sell orders, market makers create liquidity.
Who are market takers?
Market taker is a market participant who executes an order. For example, you want to buy one ether. The best offer to buy at a particular time is $2,060. You place a market order and immediately buy 1 ETH at $2,060.
Unlike market makers, market takers reduce liquidity by executing orders. It is important to note: the market orders with which they operate do not imply a predetermined price (the best one is chosen from those available on the market), but only require the trader to indicate the quantity.
Making transactions is the moment where the interests of market makers and market takers intersect. So their orders coincide (for the first to buy and for the second to sell, or vice versa) and are executed.
How similar are the trading conditions for both groups involved in creating liquidity in the cryptocurrency markets?
Exchange conditions for market makers and market takers
By and large, the only criterion that may differ for market takers and market makers on exchanges is commissions. And here everything is quite individual. There are many trading platforms, so commissions vary. The only thing that is the same for everyone is their presence: exchanges must earn money from something, and not engage in philanthropy.
Most often, platforms make concessions to market makers, since they are the ones who create liquidity and, in fact, the trading itself of a specific crypto asset. At the same time, an ordinary market participant who wants to buy cryptocurrency can act as a market taker. There are also options where reduced fees are introduced for specific instruments. Again, there are many exchanges, and each may use their own models when determining transaction fees.
Do market makers and market takers have any risks when carrying out their activities?
Market maker risks
Trading any asset is risky. And especially so volatile as cryptocurrency. Market makers, by and large, have one main problem – not to make a mistake when placing price orders. If this happens, they will suffer huge losses. This is because market makers are market participants with considerable capital.
Risks of market takers
In turn, market takers face the risk of slippage when making trades (executing an order at a less favorable price than originally expected). And sites usually set higher commissions for them. Well, just like market makers, market takers can also lose on the cryptocurrency exchange rate.
Conclusion
So, market makers for cryptocurrency are those who create liquidity, and market takers are those who carry out transactions here and now. Most often, exchanges provide more favorable commissions for the former than for the latter. At the same time, the activities of both market makers and market takers are associated with a certain risk.