In traditional finance, market makers such as Goldman Sachs and Citadel compete against each other to provide the best bid and ask, while making the spread between the two. But what does this actually mean? The “bid” is the highest price someone is willing to pay for something, while the “ask” is the lowest price someone is willing to sell something for. A market maker is trying to buy at the bid and sell at the ask, making the often small difference between the two prices as profit. These market makers are setting the bid and ask prices, and competition between them drives the bid and ask closer to each other- meaning less profit for them per trade but better prices for you and me.

On less liquid stocks and assets, market makers are often given a small fee or payment from the exchange to incentivize them to participate. However, market-making doesn’t just exist in traditional finance; the same opportunities exist in cryptocurrencies. Crypto markets have a lot of the same properties as traditional ones, but oftentimes with less liquidity. This lack of liquidity means more risk, but also more profit potential for market makers.

Big Names

Let’s analyze some of the big name companies in the crypto market-making space today. Currently, the space is filled with many competitors. We will look at 4 prominent companies: Gotbit, GSR, Wintermute, and Kairon Labs.

Gotbit’s market-making strategy places an emphasis on high performance. They use an AI market-making algorithm to analyze the market and adjust in real time. However, alongside the algorithm, the company also has a curated team of traders, managers, and analysts (hailing from firms like Goldman Sachs, Deloitte, McKinsey, and KPMG) who work to monitor and improve the performance of the algorithm.

GSR leverages its strong partnerships with leading crypto projects and exchanges. They provide customized KPIs to match their value proposition for each partner. Currently, they offer their services across 60+ venues.

Wintermute focuses on early equity rounds, helping new projects enter the cryptocurrency market. They make heavy use of algorithms and offer their own OTC trading desk. Additionally, they provide both spot and derivative markets.

Kairon Labs directs their efforts towards utility tokens and digital assets. They have a number of notable partnerships including those with Elastos, Seedify (SFUND), and Harvest Finance. Besides market-making services, Kairon Labs also provides exchange listings, sponsorships, advisory, and IP licensing.

Derivatives

In contrast to trading liquidity in a traditional financial market, the crypto space differs quite significantly in the underlying system on which the buyer and seller trades. Traditional currencies are managed in a centralized hub-and-spoke system, whereas many cryptocurrencies operate in a decentralized structure with no intermediaries. To put into perspective the scale of the crypto market, the top three crypto exchanges alone — Binance, Coinbase, and Kraken — consist of a staggering $10Billion of trading volume. With this amount of liquidity in the crypto market, it is not surprising that investors gravitate towards options and futures trading, otherwise known as derivatives.

Options trading can be described in two types: the call and the put. The call option essentially gives a buyer the right to buy the asset at an expiry date that is already set in price, at and selling for the put option — at any time until the contract expires. If the asset is held until the expiry date, the contract is worth nothing. A futures contract is fairly similar to options in that a buyer and a seller agree at a predetermined price and date for sometime in the future. The main difference between options and futures is that a futures contract is settled at the expiration date. The more the price rises until the expiry, the more profit the person holding the position will make.

Crypto derivatives provide a way for organizations to make big profits from the unpredictable cryptocurrency markets without putting their money in high-risk investments. Since cryptocurrency prices can change quickly and drastically, investors need to be able to protect themselves while still taking advantage of the potential rewards.