So your tokenized project has everything in order to be listed on an exchange. You have spent a considerable part of your budget on marketing, have a few crypto advisors, have raised capital through pre-sales and there’s an exchange willing to list your project for some fee. So you go for it.
As time goes by, you might notice there are big challenges with respect to the trading of your token. Prices are volatile, the spread is too large…There is a sense that the investors are running away and the price is continuously dropping. Due to the low volumes, new investors are reluctant to buy in and a snowball effect begins. That’s why liquidity matters.
This is a depiction of a very common scenario we encounter for many unadvised first-time project founders. However, there's a solution for recently-listed tokenized projects that still lack volume. It is called market making.
As time goes by, you might notice there are big challenges with respect to the trading of your token. Prices are volatile, the spread is too large…There is a sense that the investors are running away and the price is continuously dropping. Due to the low volumes, new investors are reluctant to buy in and a snowball effect begins. That’s why liquidity matters.
This is a depiction of a very common scenario we encounter for many unadvised first-time project founders. However, there's a solution for recently-listed tokenized projects that still lack volume. It is called market making.
WHAT IS MARKET MAKING?
The market is essentially two sided. One is composed of market takers such as investors, day-traders and speculators – the side that takes liquidity from the market. This side is driven to making a profit by directionally betting on price action. Market takers consider two things very important: Liquidity (being able to execute their trades) and Immediacy (doing it as quickly as possible). Market makers are on the other side acting as an “invisible hand”. They are the ones stabilizing prices, by filling the order book on both sides and closing spreads.
Market makers usually make their profit by operating the spread. In low liquidity markets, spreads tend to be higher and market makers can profit there. Below, we describe a hypothetical order book to illustrate this..
The “ask” price is what a buyer needs to pay in order to get the amount of tokens desired, while the “bid” price is what a seller will get by selling that position. As we can note, someone can put a bid (buy) at 96 USD and ask (sell) at 99 USD, being the first position on both sides of the orderbook. If both trades were to be executed (meaning at some point someone was willing to take the 96 USD bid, and another person was willing to take the 99 USD ask), this agent would book a 3 USD profit (excluding trading fees) with “virtually” no risk. This is something that market makers commonly do. Using advanced quantitative algorithms to post multiple orders in a short period of time, the market maker is able to operate these kinds of situations.
Market makers usually make their profit by operating the spread. In low liquidity markets, spreads tend to be higher and market makers can profit there. Below, we describe a hypothetical order book to illustrate this..
The “ask” price is what a buyer needs to pay in order to get the amount of tokens desired, while the “bid” price is what a seller will get by selling that position. As we can note, someone can put a bid (buy) at 96 USD and ask (sell) at 99 USD, being the first position on both sides of the orderbook. If both trades were to be executed (meaning at some point someone was willing to take the 96 USD bid, and another person was willing to take the 99 USD ask), this agent would book a 3 USD profit (excluding trading fees) with “virtually” no risk. This is something that market makers commonly do. Using advanced quantitative algorithms to post multiple orders in a short period of time, the market maker is able to operate these kinds of situations.
WHY NEW TOKENIZED PROJECTS USUALLY LACK LIQUIDITY?
While top crypto currencies have enough organic trade volume for market makers to compete against each other and provide liquidity out of their own willingness (seeking profit), new listed tokenized projects often do not have the necessary organic volume to entice market makers and will often fall in a “liquidity trap” due to lack of liquidity provision. It is a “chicken and egg” problem: because there is no liquidity, new investors are unwilling to take directional risk scared by the future impossibility of realizing their positions, and there is no liquidity because potential investors are scared away.
A tokenized project needs other players like investors and exchanges to contribute to the liquidity of the token. At the same time, the exchanges and crypto investors want some assurance of a liquid market in order to participate. As we can note, it’s a vicious cycle.
To list on an exchange, the tokenized project can be charged as much as a 7-digit fee. The crypto exchange also doesn’t want a “ghost town” token listed on their platform, with no trading going on, since that looks bad for them.
Investors see illiquid markets as an indication of a market that can be potentially very hard to exit and as a symptom of low user interest. Low liquidity is the biggest red flag in crypto, scaring off everyone who is a potential buyer and sometimes even causing panic selling. Furthermore, if there is strong buying or selling pressure in an illiquid market, prices can move exaggeratedly, creating a problem by attracting some clueless investors that are afraid of missing out on a good opportunity, a FOMO style buy-in. That leads to an unsustainable price level with little support, creating a highly volatile market with constant pumps and dumps which also raises alerts for investors and users.
A tokenized project needs other players like investors and exchanges to contribute to the liquidity of the token. At the same time, the exchanges and crypto investors want some assurance of a liquid market in order to participate. As we can note, it’s a vicious cycle.
To list on an exchange, the tokenized project can be charged as much as a 7-digit fee. The crypto exchange also doesn’t want a “ghost town” token listed on their platform, with no trading going on, since that looks bad for them.
Investors see illiquid markets as an indication of a market that can be potentially very hard to exit and as a symptom of low user interest. Low liquidity is the biggest red flag in crypto, scaring off everyone who is a potential buyer and sometimes even causing panic selling. Furthermore, if there is strong buying or selling pressure in an illiquid market, prices can move exaggeratedly, creating a problem by attracting some clueless investors that are afraid of missing out on a good opportunity, a FOMO style buy-in. That leads to an unsustainable price level with little support, creating a highly volatile market with constant pumps and dumps which also raises alerts for investors and users.
HOW CAN A MARKET MAKER SOLVE THE LIQUIDITY PROBLEM?
- Hiring the service of a professional market maker can bring a healthy trading environment to your tokenized project. There are several benefits of having a professional, third-party market maker by your side.
- Liquidity attracts liquidity. By reducing spreads and volatility and increasing order book depth, the actions of the market makers are capable of attracting more organic buyers. When the trading environment is healthy, investors are more willing to buy in and this will bring even more organic volume to the order book, creating superior liquidity for market takers. That means that projects usually do not need a market maker forever, just until volume is good enough to sustain itself.
- More and more quality organic investors. New and higher quality investors are attracted to your token because of the increased liquidity. A liquid market can attract a more diverse trading community that includes institutional investors. That means higher volumes which gives more confidence in the token’s community.
- Increase token prices. Higher volume and investor confidence tend to drive the token price up, since there are more investors willing to buy and hold the token, knowing that, if needed, they will be able to sell their position quickly.
- Better negotiation with exchanges. By having a market maker by your side, exchanges will have better assurances through the listing process. Having a market maker is an insurance that your token will be liquid on their platform and they will be more likely to charge you a more competitive fee. In addition to this, once your tokenized project exhibits a liquid market in one exchange, it is considerably easier to negotiate more favorable terms with additional exchanges, growing the community even further.
- Liquidity is an extremely important variable in the crypto market equation, enabling your token to produce the best possible result, but it rarely comes by itself. To create liquidity you need a professional market maker to support you, one that has the tools required to satisfy your demands. Keeping prices within certain levels, populating the books in specific ranges, helping you design a trading strategy for your token: those are among the things a market maker should be able to provide you.
WHY CHOOSE ATOMIC?
There are several reasons to choose Atomic over other market makers out there. To name just a few:
- Pricing: our monthly charge is extremely competitive and can fit your budget. Most market makers charge extra for trading more than one pair in one exchange - Atomic only charges a flat monthly fee
- Experienced and seasoned team: we’ve been in the crypto industry for more than 6 years and we know what we’re doing. Previously on tech and finance, our background is perfect for MM in crypto
- Excellent customer support / consulting: you’ll receive recurring reports (live/daily, weekly and monthly) that constantly feed you with all relevant data. We’re always available on TG or for a call whenever needed
- Arbitrage between exchanges: we’re professional traders and used to benefiting from arbitrage opportunities between exchanges. We’re integrated in more than 40 exchanges, trading hundreds of pairs. We can help generate volume and cash flows to your treasury in a manner other market makers cannot
- Latin America presence: we are integrated and well connected in all major Latin American exchanges and we can help you penetrate this market with special conditions if you wish to
- Proprietary technology, best indicators: we have cutting edge proprietary technology that allows us to operate in the most efficient way, making the best out of your funding
Do you have any doubts? Want to know more? Don’t hesitate to contact us at desk@atomic.fund