What Is Market Maker in Crypto? How Do They Work?

Imagine you open your trading app and decide to buy Bitcoin, Apple stock, or even some obscure cryptocurrency you’ve just heard about. You click “Buy,” and—within a fraction of a second—the transaction goes through. Someone has sold what you wanted to buy, instantly, at a fair market price.

But who is that “someone”?

Most people assume it’s another trader just like them on the other side of the trade. Sometimes, yes. But most of the time, that other party isn’t a regular trader—it’s a Market Maker (MM).

Market makers are the silent backbone of every financial market. They ensure trades can happen continuously, prices remain stable, and liquidity (the ability to buy and sell easily) never disappears. Without them, the modern financial system would seize up like a machine without oil.

This article explores, in clear and simple terms, what market makers are, how they work, why they exist, and what their role looks like in both traditional finance and cryptocurrency markets.

Key Terms Explained

Before diving into the main discussion, here are some essential terms you should understand. These concepts appear frequently throughout the article and are the foundation for understanding how market makers operate.

• Liquidity describes how easily an asset can be bought or sold without significantly affecting its price.

  • High liquidity means there are plenty of buyers and sellers, so transactions happen quickly and prices remain stable.

  • Low liquidity means trades take longer and prices can jump suddenly.

• Bid Price is the highest amount a buyer is currently willing to pay for an asset. If you are selling, this is the price you’ll likely receive.
• Ask Price (or Offer Price) is the lowest amount a seller is currently willing to accept. If you are buying, this is the price you’ll likely pay.
• Spread is the difference between the bid price and the ask price. Market makers earn their main income from this difference. 
  Example: If Bitcoin’s bid is $64,990 and its ask is $65,010, the spread is $20.
• Liquidity Provider (LP) is any participant who supplies funds to a market to make trading easier. All market makers are liquidity providers, though not all liquidity providers are professional market makers.
• Market Order vs. Limit Order

• • Market Order: An instruction to buy or sell immediately at the best available price.

  • Limit Order: An instruction to buy or sell at a specific price (or better). Market makers typically place thousands of limit orders to create liquidity.

• Hedging means taking an opposite or offsetting position to reduce risk.
  For example, if a market maker holds too much Bitcoin, they might sell Bitcoin futures to protect themselves if the price falls.
• Volatility refers to how much and how quickly prices change. High volatility means prices move rapidly; low volatility means they’re relatively stable.
• Automated Market Maker (AMM) is a smart contract that automatically provides liquidity using mathematical formulas instead of human decision-making. Uniswap and Curve are famous AMMs.
• Impermanent Loss is a risk faced by liquidity providers in AMMs when the prices of the two tokens they’ve deposited move significantly relative to each other, causing potential losses compared to simply holding those tokens.

What Exactly Is a Market Maker?

A Market Maker is a firm, institution, or individual that stands ready to buy and sell an asset at any given time, quoting both a bid price (the price they’re willing to buy at) and an ask price (the price they’re willing to sell at).

This is what’s known as “providing liquidity”—they make sure there’s always someone to trade with.

Let’s break it down with a simple analogy:

Imagine a neighborhood convenience store. The store buys bottles of water from the distributor for $0.80 and sells them to customers for $1.00. The store doesn’t know exactly when customers will come in or how many bottles they’ll want, but it keeps a steady stock ready. That $0.20 difference is their compensation for holding inventory, taking on risk, and being “ready to sell” at any time.

Market makers do precisely this—but with digital or financial assets like stocks, bonds, or cryptocurrencies.

The Bid-Ask Spread and How Market Makers Earn Money

Every asset in a market has two prices at any given moment:

• Bid Price: What someone is willing to pay for the asset.
• Ask Price: What someone is willing to sell it for.

The difference between the two is called the spread.

Market makers profit from this spread.
Let’s say a market maker is quoting prices for Ethereum:

• Bid (buy): $2,999
• Ask (sell): $3,001

If a trader sells Ethereum, the market maker buys it at $2,999. If another trader later buys Ethereum, the market maker sells it at $3,001. That $2 difference (the spread) is their gross profit per unit.

Of course, real markets involve thousands of trades per second, with spreads often measured in fractions of a cent—but multiplied by huge trading volumes, the profits can be substantial.

Why Do Markets Need Market Makers?

Without market makers, financial markets would often freeze or become erratic. To understand why, imagine a simple case:

You want to sell your stock in a small company. But what if, at that moment, no one else wants to buy? You’d have to lower your price dramatically to attract a buyer, creating instability and volatility.

Market makers prevent that by always providing both a buy and sell offer, regardless of market conditions. Their continuous presence means:

• You can buy or sell instantly.
• Prices change smoothly instead of violently.
• Market confidence stays high.

In short: they keep the market alive.

Market Makers in Traditional Finance

In traditional financial markets (like the New York Stock Exchange, NASDAQ, or foreign exchange markets), market makers are typically large institutional firms with access to significant capital, advanced trading systems, and complex algorithms.

Examples of traditional market makers:

• Citadel Securities
• Virtu Financial
• Jane Street
• Susquehanna International Group (SIG)

These firms have special agreements with exchanges to quote prices continuously and maintain orderly markets. In return, they receive benefits like reduced trading fees, access to faster trading systems, or even small financial incentives.

Example in action:

Suppose you’re trading Apple stock (AAPL). Citadel might post:

• Bid: $189.95
• Ask: $190.00

If someone sells to Citadel, they buy at $189.95. If someone else buys, they sell at $190.00.

Even if thousands of traders are coming and going, Citadel’s algorithms adjust their prices every millisecond to keep the market flowing.

Risk and Hedging: How Market Makers Manage the Chaos

Market making sounds easy—buy low, sell high. But reality is more complex because prices can change before the market maker has a chance to sell what they bought.

This creates inventory risk.

For instance, if a market maker buys 1000 shares of a stock at $100 and the price suddenly drops to $98 before they can sell, they lose $2,000.

To manage this, they use hedging strategies. That means they might open offsetting positions in other markets or use derivatives (like options or futures) to protect themselves against price swings.

They also use high-frequency trading (HFT) systems to adjust quotes in real-time—sometimes thousands of times per second—to minimize exposure.

Market Makers in Cryptocurrency

The crypto world adds new layers to market making. Unlike traditional finance, where only large firms can act as market makers, crypto allows anyone to provide liquidity, depending on the type of market.

There are two main types of crypto markets:

1. Centralized Exchanges (CEXs) – like Binance, Coinbase, or OKX.
2. Decentralized Exchanges (DEXs) – like Uniswap, Curve, or PancakeSwap.

(a) Market Makers on Centralized Exchanges

On CEXs, professional firms such as Wintermute, Jump Trading, or GSR perform the same role as in traditional finance: continuously quoting prices and ensuring order book liquidity.

Example:
On Binance, a firm like Wintermute might quote:

• Bid: 1 BTC = $64,995
• Ask: 1 BTC = $65,005

Even if no one else is active at that moment, Wintermute ensures you can always buy or sell Bitcoin without delay.

(b) Market Makers on Decentralized Exchanges (AMMs)

DEXs don’t rely on human or institutional market makers. Instead, they use Automated Market Makers (AMMs) — smart contracts that automatically set prices based on mathematical formulas.

The most famous example is Uniswap, which uses the formula:

x × y = k

Where:

• x and y are the quantities of two tokens in the liquidity pool,
• and k is a constant.

If traders buy one token, its quantity decreases, causing the price to rise automatically — balancing supply and demand.

Here, anyone can become a market maker by depositing an equal value of two tokens (say ETH and USDC) into a liquidity pool. In return, they earn a share of the trading fees from others who use the pool.

This is called liquidity provision, and it has democratized market making in crypto.

Real-World Example: How a Market Maker Operates Step by Step

Let’s walk through a concrete example.

Suppose Alice Trading Co. is a market-making firm operating on a centralized exchange.

• Step 1: Setting Initial Prices

Alice Trading Co. identifies that Bitcoin is trading around $65,000. They post:

• • Bid: $64,990 (they’ll buy BTC at this price)
  • Ask: $65,010 (they’ll sell BTC at this price)
• Step 2: Executing Trades
• • Bob, a trader, wants to sell 1 BTC → Alice Trading Co. buys it for $64,990.
  • A few seconds later, Sarah, another trader, wants to buy 1 BTC → Alice sells it for $65,010.
    Alice earns $20 from this round trip.
• Step 3: Adjusting to Market Movements

If prices start rising rapidly, Alice’s algorithms automatically update:

• • Bid: $65,100
  • Ask: $65,120

They do this to avoid being “run over” by fast-moving prices.

• Step 4: Managing Inventory

If Alice ends up holding too much BTC (say 50 BTC total), they may:

• • Hedge their position by selling Bitcoin futures on another exchange.
  • Or, temporarily widen their spreads to slow down further purchases.

Through constant adjustment, they balance their portfolio while keeping liquidity stable for everyone else.

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Why Would Anyone Want to Be a Market Maker?

Market making is not charity—it’s a business. There are several reasons why firms and individuals choose to do it:

1. Profit from Spreads: Even small spreads, when multiplied by millions of trades per day, create significant profits.
2. Exchange Incentives: Many exchanges pay market makers rebates or bonuses for maintaining liquidity.
3. Strategic Influence: Market makers can gain deep insight into market flow, volatility, and sentiment.
4. Technology Edge: Sophisticated firms use proprietary algorithms that exploit micro-inefficiencies others can’t see.

However, it’s also risky. Sudden market crashes (like the 2020 COVID crash or major crypto sell-offs) can trap market makers holding assets that rapidly lose value. Successful firms rely on speed, data, and careful risk control to survive.

The Broader Impact: Market Makers as Stabilizers

The presence of market makers contributes to efficient, stable, and fair markets:

• Efficiency: Prices adjust quickly to new information.
• Stability: Liquidity cushions large trades, preventing sudden crashes.
• Accessibility: Retail traders can buy or sell instantly without worrying about finding a counterparty.

In a world without market makers, trading would resemble a deserted bazaar—buyers and sellers shouting prices, waiting, and hoping someone shows up. Instead, with market makers, markets resemble a smooth, humming machine where everything works seamlessly behind the scenes.

How Crypto Changed the Concept of Market Making

Before crypto, market making required massive infrastructure—servers close to exchanges, regulatory approval, and millions in capital.

Now, decentralized finance (DeFi) has redefined the game. Through AMMs, ordinary users can act as liquidity providers. By depositing tokens into a pool, they earn a share of transaction fees—essentially performing the same role as a traditional market maker.

However, DeFi introduces new types of risks, like:

• Impermanent loss: When the price of one token in the pool moves sharply relative to the other, liquidity providers can lose value compared to just holding the tokens.
• Smart contract risk: Bugs in the code can lead to funds being lost or stolen.

Still, this new model has made the idea of “market making” more open, transparent, and accessible than ever before.

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Conclusion: The Invisible Rhythm of the Market

Market makers are the invisible hands that keep the rhythm of global markets steady. They absorb uncertainty, bridge buyers and sellers, and create the smooth experience most traders take for granted.

In traditional finance, they are the unseen professionals with lightning-fast systems and deep capital pools.
In crypto, they are both professional firms and everyday users—code and people working together to sustain decentralized liquidity.

Every time you press “buy” or “sell,” remember: somewhere behind that instant click is a market maker—quietly quoting, adjusting, balancing, and keeping the heartbeat of the market alive.

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