What is a crypto market maker?

A crypto market marker is an individual or company that operates in crypto exchanges, buying and selling tokens of a given project directly from other market participants.

The market maker aims to profit from differences in average price paid and average price sold. Crypto exchanges rely on market makers to provide orderly trading of tokens, options, and other products listed on their platforms.
Crypto exchanges operate digitally and allow a variety of individuals and institutions to make markets in a given token or coin. More participants mean more liquidity, and marker makers add to that, increasing competition and making order books more efficient. This extra liquidity added by market makers translates into reduced spreads, more depth on the order book, reduced volatility, benefitting all participants.
In return for providing this service, market makers make profit in two ways, which will be described in deeper detail further:

  1. From harvesting the spread between the bid and ask
  2. From buying or selling when there are significant market imbalances

Crypto Spot Market Makers
Spot market makers on crypto exchanges started to appear when crypto markets got more mainstream and traditional financial institutions started to enter the crypto market. Many players working in traditional market making firms started entering this market with the idea of replicating what they were doing previously on their firms to operate, bringing more liquidity to the crypto market since spreads were more attractive in this industry.
Today, there are hundreds — if not thousands — of market makers, both human and digital, providing services to various crypto exchanges. These can range from large market making firms or broker-dealers making markets multiple tokens or even individuals or niche firms that concentrate in the market making just a few different tokens.

Options and Futures Crypto Market Makers
Derivative crypto market making, especially options, is a much more complex market. Given that each individual listed project can have dozens or hundreds of different corresponding options contracts with diverse strike prices and expiries, it's difficult for a human to make a broad market across an entire crypto option market or futures series.
Nowadays, options market makers have sophisticated series of pricing models and risk management algorithms to help offer reasonable liquidity even in fast-changing market conditions.

Who Are Crypto Market Makers?
Crypto market makers can either be individuals or broker-dealers who meet a certain set of requirements around education, training, capital adequacy, and so on.
There is a wide range of crypto market makers from crypto focused institutions down to specialized shops and individuals. Some examples are DRW, Alameda, Wintermute, GSR and Atomic Fund.

How Crypto Market Making Works
Crypto Market makers simultaneously post bid and ask for a token. While posted, the order obligates the market maker to honor that offer if someone wants to transact at that price. This creates a reliable ecosystem for traders, since they can see through the order book  just how much bid and ask is available at varying prices and this creates deeper order books in terms of liquidity across all price levels.
Throughout the day, market makers will be both buying and selling the same underlying security countless times. If successful, a market maker's operations will turn a profit by selling tokens at a marginally higher average price than they were purchased at.

How Crypto Market Makers Make Money
Crypto Market makers have two primary ways of making money:
1. Collecting the Spread
The first is from collecting the spread between the bid and the ask on a token. Suppose a project is trading at $5 per token. A market maker may post a bid to buy 1,000 tokens at $4.90 and an offer to sell 1,000 tokens at $5.10. If both orders fill, the market maker will have bought 1,000 tokens at $4.90 and sold at $5.10, making a 20 cents per token, or a total $200 profit.
2. Taking on Inventory
The other way crypto market makers earn money is through taking on inventory. When there is a supply or demand imbalance in a token, crypto market makers will often accumulate a large position in a token. When there is panic selling following a negative news announcement, for example, crypto market makers are often the people buying as the crowd rushes to get out of the token. Once things calm down, the market maker can slowly unload the inventory at more favorable prices, earning a profit for their willingness to absorb the risk during the panic selling.
Hypothetical Example of a Crypto Market Maker's Day
Let's imagine how trading might go for a market maker in Ethereum (ETH) token on the day of one of its merge events. In the morning, there's a lot of buzz around what new things Ethereum might unveil or happen as adoption of this blockchain can increase based on their scalability capacity. Traders clamor to buy Ether ahead of the event.
The crypto market maker, facing significantly more demand than supply of tokens, sells through much of their inventory to retail investors at steadily increasing prices. This is a useful market function, since few other traders want to sell ahead of the product launch, but a market maker does provide a bid and ask regardless of market conditions.
Afternoon arrives, and the event is a bit of a disappointment. There are no revolutionary features for Ethereum's mainstay developments and traders lose interest in the story. Now there's some rush to sell Ether, with few people willing to buy - except the crypto market maker, that is. The crypto market maker is a steady buyer of Ether at declining prices as traders move to unload their positions. In this way, the crypto market maker refills their inventory of Ether which had previously been sold in the morning.