Cryptocurrency can gain value on exchange platforms. It increases in value based on supply and demand. The supply of a cryptocurrency depends on how many new coins are being mined and how many current owners want to sell their coins.
The demand for cryptocurrency depends on many factors. Despite the market's state, several altcoins are rising, even after the FTX collapse and the aftermath. Some of the factors have been the reason behind such a pump.
We focus on the importance of market makers in this pump.
What do Market Makers do?
It is important to note that all altcoins listed on top-tier exchanges have some market maker. A market maker (MM) is a bot/algorithm that makes the market meaningful by buying and selling the side of the order book with bids/asks.
Markets with a large spread are generally considered to be liquid. Without a market maker, many crypto markets will become much less active. This is because they fulfill the role of actively placing orders to earn profits based on the spread. In this way, market makers play a key role in maintaining liquidity.
Besides, Top tier exchanges have liquidity requirements for listed assets. A liquidity requirement might, for example, read something such as: "$50,000 worth of bids/asks within -+5% of market price."
Projects hire market-makers to provide sufficient liquidity on the exchanges. There are several other market-making agreements, but token loans/options are the most common.
Market-makers aim to be delta neutral. It means that, for example, at the end of each day/week/month, they aim to have executed the same value of bids/asks.
The Idea of Evil Market Makers
However, some managers carry out their activities in a shady manner. One thing about them is that they do not care about the tokens, as their main goal is to stack as much USDT from the token loan as possible. Individual losses are their profits. Algorithms are designed to pull bids/asks once bigger orders are executed to increase slippage temporarily.
Besides, there is usually no transparency over what the market makers are doing with borrowed tokens before the end of the borrowed term.
As such, the reason for the suppression of the price to pump. It is simply a market maker distributing tokens above a certain price. This is the case with Alameda, using such tactics daily, ultimately resulting in its fall.
Additionally, the projects use market makers to sell team and treasury tokens. The obvious move is to ramp up marketing, release major news and then sell on retail.
Reason for the Price Pumps
The typical play in using market makers is to ramp up marketing, release major news and then sell on retail.
One reason for the price pump is that it is costly to provide tight spreads on altcoins. As such, once the market takes a hit, makers reduce exposure. They often reduce exposure below the liquidity requirements set in the token loan contracts. As a result, there is an empty order book, pumping the price with a few percentages.
One can benefit from such pumps by setting alerts and entering shorts.
Comments