What is a market maker and how does their activity structure the crypto market

A market maker is a specialized participant in cryptocurrency trading whose activity determines liquidity and price stability of assets. Serving as providers of continuous trading activity, these participants place simultaneous buy and sell orders, creating a market environment where traders can enter and exit positions without hindrance. Without their presence, crypto markets would face critical issues: wide gaps between bid and ask prices, sharp price swings, and difficulties executing large trades.

In the 24/7 cryptocurrency ecosystem, market makers perform the function of an electrolytic system — maintaining a constant flow of trading activity that enables efficient and predictable price formation. Their algorithmic strategies and high-frequency trading systems allow rapid adaptation to changing market conditions, reducing volatility and stabilizing asset quotes.

Definition and Role of a Liquidity Provider

A market maker is an institution or trading firm that continuously provides a two-sided flow of orders — simultaneously posting bids and asks for the same asset. This fundamental definition captures their core function: acting as an intermediary between buyers and sellers, enabling each side to complete transactions at fair and optimal prices.

The main profit comes from the spread — the difference between the buying and selling price. For example, if a market maker posts a buy order for Bitcoin at $100,000 and a sell order at $100,010, each successful pair of trades yields a $10 profit. Multiplied across thousands of transactions, this margin forms a steady income source.

The difference between market makers and regular traders lies in their trading approach. Retail traders attempt to buy low and sell high, hoping for directional market moves, whereas market makers profit regardless of price direction. Their goal is to provide liquidity and minimize spreads, not to bet on price movements.

On centralized exchanges (CEX) and decentralized exchanges (DEX), market makers play equally important roles, though mechanics differ slightly. On CEXs, they receive fee discounts for providing liquidity; on DEXs, they operate through liquidity pool protocols, earning a share of trading fees.

Mechanics: From Algorithms to Execution

A market maker’s work is a symbiosis of four elements: order placement, spread management, position control, and process automation.

First — strategic order placement:

A market maker doesn’t just randomly place orders. Using advanced data analytics, they analyze:

• Market depth (number of open orders at various price levels)
• Asset volatility and expected price fluctuations
• Trading volumes at different times of day
• News and events that could impact prices

Based on this data, the system determines the optimal spread size. In highly volatile markets, the spread widens (e.g., $50 instead of $10) to compensate for increased risk, while in calmer markets it narrows to attract more traders.

Second — continuous inventory management:

A market maker simultaneously holds large volumes of cryptocurrencies. If they have 1000 BTC for sale and there are more buyers than sellers, their position can become heavily skewed to one side, increasing risk. To minimize this, they hedge — selling excess positions on other exchanges or futures markets to insure against price drops.

Third — execution via high-frequency trading:

Major market makers like Wintermute and GSR employ high-frequency trading (HFT) systems that execute thousands of trades per second. These algorithms monitor microscopic price changes and instantly adjust orders, adapting to current market conditions. Speed is critical — even millisecond delays can lead to losses in fast-moving markets.

Fourth — automatic correction:

Market-making trading bots use machine learning to predict price movements. If the system forecasts a rise, it narrows the ask and increases bid demand to maintain current positions. If a decline is expected, it does the opposite. This dynamic adaptation helps sustain profitability even amid market uncertainty.

Difference Between a Market Maker and a Market Taker

A market maker is a distinct role from a market taker, and understanding this difference is crucial for market participants.

A market maker is a liquidity provider who posts limit orders. These orders remain in the order book, waiting for another party to accept them. A trader who wants to immediately buy Bitcoin at the current market price fills the market maker’s sell order, and the transaction occurs instantly.

A market taker is an immediate trader who accepts existing prices. When they click “buy at market price,” they fill an existing sell order (likely from a market maker). Takers pay higher fees but get instant execution.

Interaction between these roles creates an optimal trading environment:

• Market makers supply offers ready for immediate filling
• Market takers create demand that fills these offers
• Result: minimal delays, narrow spreads, low commissions

Without this balance, crypto markets would become illiquid, forcing traders to wait hours for counterparty matching.

Leading Firms Shaping the Market

As of February 2025, several companies dominate crypto market making, providing liquidity for major assets and new tokens.

Wintermute — Algorithmic Leader

Wintermute is one of the most active firms in this space, managing approximately $237 million in assets across more than 30 blockchains. As of November 2024, their trading volume reached nearly $6 trillion. They serve over 50 crypto exchanges worldwide.

Wintermute’s strength lies in their advanced algorithmic models and ability to service multiple assets across platforms simultaneously. However, they tend to focus on large projects and are slower to adapt to niche or micro-tokens.

GSR — Multi-Profile Service Provider

GSR has over a decade of experience, investing in more than 100 leading crypto projects. They offer a comprehensive suite of services: market making, OTC trading, derivatives trading, and liquidity management. GSR provides liquidity on over 60 exchanges globally.

Their advantage is long-term relationships with projects and ecosystem understanding. The downside is that their services are often more expensive for smaller projects, as they target institutional clients.

Amber Group — Risk Management via AI

Amber Group manages around $1.5 billion in trading capital for approximately 2000 institutional clients. Known for innovative risk management approaches using artificial intelligence and sophisticated analytics, their total trading volume exceeds $1 trillion.

Their focus on compliance and technology makes them attractive to regulated institutions. However, entry barriers are high.

Keyrock — Specialization in Depth

Founded in 2017, Keyrock processes over 550,000 trades daily across more than 1,300 markets via 85 exchanges. Besides market making, they offer treasury services, liquidity pool management, and ecosystem development.

Keyrock’s approach is data-driven and optimized for specific asset conditions, making them effective for mid-tier projects needing tailored solutions.

DWF Labs — Supporting Early Projects

DWF Labs is an investment and market-making firm managing a portfolio of over 700 projects. Notably, they support over 20% of projects in the Top-100 CoinMarketCap and over 35% in the Top-1000. They trade on spot and derivatives markets across more than 60 leading exchanges.

Their strength is working with early-stage projects, but they operate selectively, accepting only projects that pass strict evaluations.

Impact on Exchanges and Traders

A market maker is not just a technical participant — they are a market architect, influencing the experience of every trader and the health of platforms.

Enhancing liquidity and market depth

When market makers are active, the order book deepens significantly. Instead of traders waiting hours to execute large Bitcoin positions, they can buy or sell substantial amounts instantly through market maker levels. This reassures institutional investors and large retail traders, making exchanges more attractive.

Stabilizing volatility

In low-activity markets with narrow order books, prices can jump sharply with each new order. Market makers absorb such shocks. Their constant presence and willingness to trade at various levels dampen sharp fluctuations. During panics, they act as buyers, supporting the price; during excessive optimism, they provide supply, preventing explosive swings.

Reducing transaction costs

Narrow bid-ask spreads mean traders lose less money just to open positions. If the spread is $1,000 on Bitcoin, it’s costly; a $10 spread (thanks to market makers) saves thousands of dollars on large trades. This makes crypto trading more accessible and economical.

Supporting new listings and projects

When a new token is listed, organic trading may be absent initially. Market makers provide initial liquidity, enabling traders to start trading immediately. Many projects hire market makers as part of their launch strategy to ensure a healthy start for the asset’s ecosystem.

Attracting traders and increasing exchange revenue

Liquid markets with tight spreads and quick execution attract more traders. More traders mean higher trading volumes and increased fee revenue for the exchange. Consequently, exchanges often pay market makers via fee discounts or direct compensation, viewing it as an investment in platform quality.

Risks Faced by Liquidity Providers

Despite their critical role, market makers face significant risks.

Volatility and position losses

Crypto markets can experience sharp drops within hours or minutes. If a market maker holds a large position and the market moves against them, losses can accumulate rapidly. This is especially risky for low-liquidity altcoins with more extreme price swings. Even hedging doesn’t always fully protect against such events.

Systemic and technical failures

Market makers rely heavily on their systems and algorithms. If their infrastructure fails during volatile periods, they may be left with open positions and uncontrollable market impacts. Cyberattacks, latency issues, or exchange connectivity problems can lead to unforeseen losses.

Inventory risk

To provide liquidity, market makers must hold large crypto holdings. If asset prices suddenly fall, their portfolio can devalue significantly. Managing this risk requires constant rebalancing and hedging, which incurs costs.

Regulatory uncertainty

Regulations around market making vary by jurisdiction and are constantly evolving. In some regions, market making could be viewed as market manipulation if not compliant. Firms operating globally must monitor legal changes, increasing compliance costs.

Counterparty liquidity risk

If a market maker needs to quickly hedge a large position, they may find insufficient liquidity on the target exchange or market. This creates a vicious cycle where attempts to hedge risk introduce new risks.

The Future of Market Maker Roles

Market making is an evolving role adapting to the growth of crypto markets. As decentralized finance (DeFi) develops and new trading venues emerge, this role transforms. Automated market makers (AMMs) in DeFi already partially replace traditional market makers, allowing anyone to provide liquidity. However, on centralized exchanges, professional market makers remain indispensable.

Market makers are the backbone of crypto markets. They provide liquidity, stabilize prices, reduce trading costs, and enable 24/7 operation. Despite the risks they bear, their presence is vital for the health and maturity of the digital asset ecosystem. As the crypto market becomes more complex and sophisticated, the role of market makers will only strengthen, shaping how investors and traders interact with assets in the digital age.