Liquidity is a major consideration in having an exchange platform, more a centralized on. with the advent of cryptocurrency, exchange platforms brought about numerous markets and so a big demand for liquidity.
Market makers are major liquidity providers and today we will be learning about them.
Good day Beautifu Steemians, I am @hadassah26, welcome to my Steemit cryptoacademy season 4 week 6 homework for professor @reddileep on Market makers.
1-Define the concept of Market Making in your own words.
What is market-making?
When somebody wants to buy or sell cryptocurrencies, you must head straight to an exchange which most times are dependent on your choice where buyers and sellers usually meet and the price they are depending on the supply and the demand which can be said to be the volume which gives the market more liquidity at that moment, which is translated to the bid price which is the price to buy and Ask price which is the price to sell, usually the difference between the bid and the ask is known as Spread.
If the available number of participants currently at the market who wants to trade is small, it may be difficult to execute buy order or sell order, because the spread will be too large and the market will be considered illiquid.
New Exchanges or newly listed coins that just got their IO or ICO most times due to lack of awareness by lack liquidity and their spread are mostly big. The exchanges or new coins normally ask professionals to provide a bid-ask spread to continue to market by using the huge sum of assets to buy and sell at the same time.
These professionals normally make the market by using this, this process is called the concept of market-making.
Market makers normally don’t base their trading on market movements, but their profit is made by the difference between the ask and the bid price which is known as the Spread. A market maker places his/her order on the top of the order book and sells it immediately, their profit is the spread minus transaction fees.
The risk market maker have is sometimes the market drops so quickly, that the professionals are not able to sell the assets they bought newly, with a small profit.
2-Explain the psychology behind Market Maker. (Screenshot Required)
As I have pointed out earlier that market makers, provide a huge amount of liquidity. Market makers are found nearly on all the markets, the market makers found on the cryptocurrency, currency market makers, bond market makers. Cryptocurrency markets need to have a continuous market running, where there is high liquidity that will enable people to buy and sell their assets.
So what or who the Market maker be? Would it be a brokerage, a rich individual or group of people, or even a big bank? Market makers are in the market to make a profit, a typical market maker will have a price that is called a bid-ask price and the gap is called a spread. How does market making works?
Seeing you go into the Binance exchange, and then let's say you are using a pair of BTCUSDT, and at that point, the Bid price was $2500 and the asking price was $2550, which make the gap which is also called the spread is $50 at the moment.
From the above illustration, the market makers buy at the bid price that $2500 and further sell at the Ask price that is $2550. Market makers normally buy low or what is called the dip and sell when the market has gone very high and the spread is how much more they make. But for you as an individual to gain from market makers, you need to do the opposite of what the market makers are doing, like if they buy, you should sell and they sell, you should buy.
The market makers gain more when the spreads are wider. If more market makers are competing to trade in a particular market, the narrower the spread will be. This means if they have enough market makers, they are a high possibility that they will make a low profit and you will make a high profit. And if they are not many market makers in the market, the spread usually gets wider.
Now Market makers, have made different strategies for trading the market trend, for uptrend and downtrend, there are the different strategy that is being used. Some times market maker uses BOTS that does the trade automatically for them. This BOTS scan for a market with a bigger spread so more profit can be made.
3-Explain the benefits of the Market Maker Concept?
We have seen what the market makers do, who are the market makers, and how they make their profit, so the question we will be exploring is the benefits of the market makers in the crypto space.
We can’t deny the fact that cryptocurrency is gradually taking over the world because of its decentralized blockchain, security, and other great benefits. The number of available coins in the crypto space is growing daily enormously, and the has made the market makers very high in the crypto space. Because they are looking for opportunities in the new coin markets and other markets with a high spread. The benefits of the market maker can be seen below.
- One major importance of the Market makers is that it has increased the liquidity of many cryptocurrencies and small traders can comfortably trade it without being scared of the spread.
- The Liquidity that market makers provide is both for buyers and sellers, making the market move in both directions.
- Due to the intervention of market makers, traders now know when to enter the market and when to leave the market, thereby making their profit high and reducing their losses
- Market makers have also helped to reduce market price volatility in the market.
- Due to the high number of investors available in the market, more traders will enter into the market at that time moving into the market more interactive for investors, this can be achieved with the help of the market makers
4-Explain the disadvantages of the Market Maker Concept?
As we have dealt with some benefits of the Market Makers, there are also some problems that market makers face in the market and that is what we want to discuss. The following are some of the problems that Market makers face During trading
- High Performance Computer: For you to trade effectively as a Market Maker, you cannot use your hand and the mouse to execute some trades, if you are barely using your hands you can make huge mistakes. So Many Market makers use High performing computers that help them execute trades at specific points and these computers are very expensive to get. If you don’t have the money you cannot afford them.
- When more market marker enters into the market, the spread will become very small, that the normal investor will hardly make a profit or they will very little profit.
- Sometimes, Market makers trick traders and make them have lost, this happens when the Market Makers are not regulated. This can be done by providing artificial spread widening or price being executed poorly. And should that the market makers are mostly responsible for the position of the price due to high assets.
5- Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
The role of the technical indicator can not be over-emphasized or even estimated, it is very important not just to the normal crypto traders but also to the market makers. Technical indicators are used for so many things in the market. Market makers use it to determine the psychology of the market at the moment and to also know the behaviour of the traders at that moment. Some indicator that the market makers uses includes the following, Moving averages, RSI, Pivot points, TDI indicators and Bollinger bands. But I will explain The Moving average and the RSI
Moving Average.
They are two types of moving average, the Simple moving beverage and the exponential moving average. The moving average is used to identify the trend of the market at a particular time given. The moving average can also be used to determine the entry and exit point of a market. In this case, we will be using the 200MA and the 50MA respectively.
The trend can be determined by crosses. And they are two types of cross. The Golden cross which indicates an uptrend in the market happens when the 50MA cross above the 200MA while the cross is the Death Cross, this occurs when the 200MA crosses above the 50MA. This type of cross indicates a downward trend. the examples can be seen below
This chart below is a BTCUSD chart in a 2-hour time frame, showing the bearish trend and what causes it using the moving averages. The cross below is a death cross and we can see how the 200MA crosses over the 50MA which signifies a clear entry point for a downtrend.
This chart below is a BTCUSD chart in a 2-hour time frame, showing the bullish trend and what causes it using the moving averages. The cross below is a Golden cross and we can see how the 50MA crosses over the 200MA which signifies a clear entry point for an uptrend.
Relative Strength Index.
The RSI indicator is momentum-based, the market makers using it to determine the trend reversal. It is made up of levels in a different period, the levels range from 0 - 100. it comprises of overbought and oversold. The overbought occurs at levels 70 to 100 which shows that a bearish reversal is about to begin and the oversold occurs between the 0 -30 the indicate that the sellers are weak and the buyers are about to over the market, the market maker will quickly place a buy order at this period for a bullish reversal.
From the chart above, you can gain a better understanding of what I said above. Market makers use the opportunity that the RSI provides to make a good entry point and even exit point also.
A market maker provides liquidity for traders, they achieve this by buying and selling in a particular market with a huge sum of assets thereby increasing the market volume. They make their profit from the spread. Without the market makers, I am sure trading will not be easy. Because the spread will be too big and not many traders can trade in such a market.
Cc @reddileep