10 Questions to Ask Before Working With a Crypto Market Maker

10 Questions to Ask Before Working With a Crypto Market Maker

Your Go-To Guide to Hiring a Cryptocurrency Market Maker

Market makers are popping up all over in the crypto space. Many coins hear that they should work with a crypto market maker, but they aren’t sure exactly what they do and how to go about hiring one. Today we are breaking down the basic knowledge you need to be armed with before you consider working with a market maker.

Market makers promote healthy market activity on exchanges by providing liquidity for cryptocurrencies around the clock. They use advanced algorithms and trading bots to connect buyers and sellers around the world 24 hours a day, 7 days a week. There are two types of market makers:

Traditional market makers simply make money off of the spread — or price difference — when they buy and sell, whether it be in equities, cryptocurrencies, or any other asset. Market making is generally not long-term profitable for low liquidity assets such as cryptocurrencies. It is also a highly-correlated activity, meaning that if it is profitable to make the market for an asset at a specific time period, then lots of market makers will appear at once. As soon as it becomes unfavorable, however, they all leave at once, leaving the asset with almost no liquidity.

Designated market makers (DMMs) are sponsored to provide liquid markets and tend to work for cryptocurrencies or small to medium-sized companies. They can accommodate the amount of volume needed to keep the asset liquid and available to buy and sell. Cryptocurrencies employ a designated market-making service to help ensure their coins can always be bought and sold efficiently.

If you are looking to partner with a DMM, be sure to ask these 10 critical questions.

What Credentials Does The Company Have?

The crypto world has blown up over the last few years. With over 2000 cryptocurrencies available across more than 200 exchanges, there are a ton of people scrambling to provide a huge variety of services to new blockchain-based businesses. Crypto is still an unregulated industry—which is why many users find it so attractive—but this leaves a lot of room for scam artists to occupy the new financial frontiers. It is your job to do your research and make sure you are working with credible industry leaders, both for your reputation and the financial health of your project.

How Can You Evaluate a Potential Market-Making Service?

Although the world of cryptocurrency market making is relatively new, the concept of market making is not. You should work with a company that employs finance experts and leaders in quant research and proprietary financial software development. Ideally, you should choose someone who is both an expert in cryptocurrency and traditional financial markets, such as investment banking and high-volume equities trading. The world of cryptocurrency trading mirrors that of traditional financial markets, so working with someone who has an extensive financial background is essential.

Working with a market maker who is not up to industry standards could hurt your reputation, your investors, and even crumble your project. Market makers who ask for hefty fees without the credentials and experience to justify them are popping up all over the place. If you are talking with a salesman for the company, don’t be afraid to ask who is running the show behind the scenes. Working with a market maker is typically a long-term partnership, so you want to make sure you find the right partner.

What Exchanges Are They Integrated With?

Always ask your designated market maker what exchanges they are integrated with. It is important to make sure you work with a market maker who has a wide reach across many prominent exchanges. Be sure to get an understanding of their network and how it will benefit your company. Make sure your market maker can deploy their bots on an exchange within 48 hours of your listing going live.

Can Your Market Maker Help You Get Listed on New Exchanges?

A good market maker will know the ins-and-outs of what exchanges you are looking for and will work with you to help you bootstrap up to better exchanges. Keep in mind that no service can guarantee you a spot on an exchange. In the past, some industry leaders could use their connections to get new coins on exchanges, but with the number of coins on the market, this has changed and is no longer industry standard. Be aware that any market-making service guaranteeing placement on prominent exchanges is a red flag.

What Spreads Will They Provide?

Discussing numbers is an important part of a discovery call with your potential DMM. They will have some questions for you about your volumes before they will be able to adequately provide you with estimates on what they can do for you. Spreads are not absolute and are partially based on your numbers. However, there are some general percentages that you can use as a rule of thumb when assessing their offerings. An adequate spread for a coin doing $50,000 of volume per day is about 3%. For a coin doing $500,000, the spread should be closer to 0.25% or smaller. There is, of course, a sliding scale in between these figures.

That being said, iIf your market is extremely wide without your market maker — say 90%, then expecting the market maker to bring the spread to 3% is unreasonable, and 20% would be more realistic. With that said, a market maker cannot make a tight spread out of nothing, there needs to be demand for your coin. If you do not structure your tokenomics correctly, miss your technical milestones, or don’t have effective marketing, your markets will not remain healthy no matter what a market maker does. If your market’s spread is extremely wide without your market maker, say 60%, then expecting your market maker to bring the spread to 3% is unreasonable, and 20% would be more realistic.

How Much Size Will They Show On Each Side Of The Book?

How much capital will your market maker be putting on the exchange each day? This will depend a bit on your current volume on an exchange, but there are some general guidelines you can follow:

If a coin is doing $25,000 of volume per day on an exchange, a reasonable amount would be around $5,000, with each order being around $150 and at least 3 orders being shown on each side. For a coin doing $100,000 of volume per day, $10,000 of inventory on the exchange would be appropriate, with each order being $300 or more.

There is a bit of an art to this, as it involves a lot of variables, but these are good guidelines to go off of when asking your market maker this question. If the numbers seem off, be sure to ask them their reasons behind the strategy.

What Other Coins Have They Worked With?

Ask your potential partner what other coins or projects they have worked with. Ideally, you should work with a market maker that has deployed designated market making services for at least a few top-100 coins.

Keep in mind, they may or may not be able to tell you the specifics of the companies they have worked with in order to maintain the financial privacy of their clients or to uphold privacy non-disclosure agreements, but they should be able to offer you some insight about their experience helping other coins experience success on the exchanges. You just want to make sure you are not their first coin!

How Robust is Their Technology?

Aim to work with a market maker that uses proprietary software built by an in-house team of experts. Anybody can white-label out of the box trading software and peddle it as their own. True industry leaders will have engineers on their team designing proprietary algorithms and building advanced trading bots. Don’t be afraid to ask about the reliability of their software. A company that has successfully worked with a lot of other coins is likely working with some pretty solid technology. Going with battle-tested software is always better; faulty or buggy technology will put your coin at risk.

What Is Their Uptime Guarantee?

High-quality market making technology should be designed to trade 24 hours a day with little to no downtime. Ask your market maker to provide statistics on their software uptime. Keep in mind that they may not be able to guarantee a 100% uptime, as some downtime may be out of their control when the exchanges themselves are down, or when inventory rebalances are occurring. You want to be sure that their technology is reliable, and that they have an engineer keeping an eye on their bots 24/7.

Do You Really Need to Work With a Market Maker?

Ok, now that you know what questions to ask to ensure you are working with a reliable, experienced market-making company, you should also take a look at your own organization to decide why working with a market maker might be beneficial for your company. Market making services can come in at a high price, and if you are not the final decision maker within your organization, there may be some convincing to do within your team or upper-management.

Organizations essentially hire DMMs to improve liquidity levels. Internationally, experts agree that engaging a designated market maker increases liquidity. Coins with extremely low market activity may have no other choice but to hire a DMM if they want to survive on current exchanges or be accepted onto better ones.

DMM’s are not just for low-liquidity assets. OEven organizations that are doing relatively well can still reap benefits from hiring a DMM. In traditional trade markets, partnering with a designated market maker keeps liquidity levels stable and increases an asset’s worth by an average of 3.5% each year. The choice to hire a market maker can be seen as a long-term investment and partnership. Your market maker is going to have your long-term success in mind from day one.

For many blockchain-based projects, working with a market maker will simply be a necessity. In fact, some exchanges are now even requiring it. Working with a designated market maker has more benefits than just promoting and stabilizing market activity. Having stable and high-volume activity on markets demonstrates financial success and increases an ICO’s reputation and prominence in a world where this is necessary for stability and growth.

Ask These 10 Questions to Evaluate Your Potential Market Maker

Just like in the traditional electronic trades markets, DMMs are starting to become a standard part of the industry. However, as we all know, cryptocurrency is a nonstandardized world. First, it is important to make sure you know why you are looking for a market-making provider. Be aware of your current limitations, your expectations, and what long-term benefits you hope to see after employing a liquidity provider. Being armed with realistic expectations will help you make a smart decision about who you hire.

Going in educated will help prevent you from being duped or falling into a partnership with a low-quality service provider. Remember to beware of a market maker who talks in absolutes or makes solid guarantees. Markets and finance are highly nuanced. Anyone that guarantees volume without adding any caveats, promises you’ll be listed on an exchange, or tells you what the price of your token will be should be avoided. Knowing the right questions to ask, and what kind of answers to expect will give you the upper hand while making this critical decision!

If you have any questions about market making or liquidity providers, don’t hesitate to reach out by email to [email protected]!


Jonathan Sterling

Written by

In March 2017, I quit my job as a software engineer and began travelling around the world. This open-source blog exists to share my thoughts and let my friends and family know that I'm not dead.

Posted