Ever wondered why some crypto prices jump wildly while others stay steady? This article explains what market making is, how it supplies liquidity, and what the practice means for everyday traders and earners.
What market making actually is
In any financial market, a market maker is an entity that continuously posts buy (bid) and sell (ask) orders for an asset. By doing so, the market maker creates a two‑sided market that lets other participants trade at any time without waiting for a counter‑party. The difference between the bid and ask prices is called the spread, which compensates the market maker for the risk of holding the asset.
In crypto, market makers can be professional firms, algorithmic bots, or even individual traders who allocate capital to provide depth. Their primary goal is to keep the order book populated so that a small trade does not cause a large price move. When liquidity is thin, even modest orders can shift the price dramatically, leading to “slippage” – the difference between the expected price and the execution price.
Liquidity is measured by the volume of orders near the current price and by the tightness of the spread. High liquidity means many orders are clustered close together, which reduces slippage and makes price discovery more reliable. Low liquidity, on the other hand, creates gaps that can be exploited by arbitrageurs or cause sudden spikes.
Real‑world illustration: the JPYC spike on Upbit
In September 2026, South Korea’s exchange Upbit listed JPYC, a stablecoin pegged to the Japanese yen. The opening price was 12 Korean won per JPYC, but within an hour the price surged to 37.6 won – more than four times the intended peg. Analysts traced the anomaly to “limited liquidity” on the platform: there were few buy orders to absorb the selling pressure, so the market maker vacuum allowed the price to balloon.
The incident prompted South Korea’s Financial Services Commission (FSC) to reconsider its strict stance on crypto market making. The regulator noted that “user losses occurred from the price surge after the JPYC listing” and signaled a possible carve‑out for market‑making activities to improve stability.
What this means for you as a crypto earner
If you earn passive income through staking, cloud mining, or liquidity provision, the health of the market you operate in directly affects your returns. In a liquid market, the price of the token you stake or provide liquidity for will reflect broader demand rather than short‑term order‑book imbalances. Conversely, in a thin market, sudden price swings can erode earnings or even trigger liquidation if you’re using leveraged positions.
For traders seeking to capture price differences, low liquidity can create arbitrage opportunities, but it also raises the risk of execution at unfavorable prices. Understanding whether an exchange employs market makers – either internal or third‑party – helps you gauge how reliable the quoted prices are.
How to evaluate market‑making and liquidity on a platform
- Order‑book depth: Look at the number of bids and asks within a few percent of the current price. A deep book indicates active market making.
- Spread size: Narrow spreads (e.g., 0.1 % or less) suggest competition among market makers, which is a sign of healthy liquidity.
- Volume consistency: Consistent trading volume over days or weeks reduces the chance of sudden spikes.
- Presence of designated market makers (DMMs): Some exchanges list DMMs or partner with liquidity providers. Their reputation can be a useful signal.
- Regulatory environment: Jurisdictions that allow regulated market making often have clearer rules, which can lower the risk of manipulation.
FAQ
What’s the difference between a market maker and a regular trader?
A market maker continuously posts both buy and sell orders to keep the market fluid, while a regular trader typically places orders only when they want to buy or sell a specific amount.
Can I become a market maker as an individual?
Yes, but it usually requires substantial capital, sophisticated trading algorithms, and the ability to manage inventory risk. Many individuals instead provide liquidity through decentralized finance (DeFi) pools, which function similarly.
Do market makers guarantee price stability?
They reduce volatility by smoothing out order flow, but they cannot eliminate all price swings, especially during extreme market events or when large orders overwhelm the available liquidity.
How does low liquidity affect my staking rewards?
Staking rewards are paid in the native token, so a sudden price drop caused by low liquidity can reduce the fiat value of those rewards, even though the token amount stays the same.
This article references reporting from cointelegraph.com.
