What Is Market Making Crypto: Beginner’s Guide

Published On: 2025-11-29

Prepared by Jameson Richman and our team of experts with over a decade of experience in cryptocurrency and digital asset analysis. Learn more about us.

What is market making crypto? This article explains the role of market makers in cryptocurrency markets, how crypto market making works, the strategies and risks involved, and practical steps for traders or firms who want to provide liquidity. You’ll learn the difference between centralized order-book market making and decentralized automated market makers (AMMs), see real examples and calculations, and get actionable setup tips, tools and trusted resources to begin or evaluate market making operations.

Quick overview: Why market making matters

Market makers are critical to healthy crypto markets: they narrow spreads, increase depth, reduce volatility during normal trading, and help retail traders buy or sell with lower slippage. In cryptocurrencies, market making occurs on centralized exchanges (CEXs) and decentralized exchanges (DEXs) — each with different mechanics and risk profiles. Whether you’re a professional trading firm or a retail trader exploring liquidity provision, understanding market making crypto is essential to manage capital, optimize return, and limit exposure.

What is market making crypto? — Definition and core concepts

At its core, market making crypto means continuously quoting buy (bid) and sell (ask) orders for one or more crypto trading pairs to capture the spread between them while managing inventory risk. Market makers act as liquidity providers (LPs), standing ready to buy when others sell and sell when others buy.

Bid and ask: The bid is the highest price a buyer will pay; the ask is the lowest price a seller will accept.
Spread: The difference between ask and bid; market makers aim to earn the spread repeatedly.
Order book: A live list of bids and asks on centralized exchanges. Market makers place limit orders on both sides to provide liquidity.
Liquidity pool (AMM): On DEXs, market making often involves depositing tokens into a liquidity pool where prices are set by a formula (e.g., x*y=k). These are called Automated Market Makers (AMMs).

For a formal overview of market makers in finance, see the Wikipedia article on market maker and Investopedia’s explainer on market makers.

How crypto market making works — mechanics and strategies

Order-book market making (CEX)

On centralized exchanges like Binance, Bybit, Bitget and MEXC, market makers use the order book to continuously post limit orders on both sides of a pair. Key mechanics include:

Quoting strategy: Determine price levels at which to post bids and asks (e.g., near best bid/best ask, multiple levels).
Spread management: Choose spread width — too tight and you may lose to adverse selection; too wide and you get fewer fills.
Inventory control: Keep balanced positions to avoid directional exposure. Use hedges or dynamic pricing to manage inventory.
Order refresh and cancellation: Update or cancel orders quickly to avoid resting orders being filled during sudden moves.

Many professional market makers run algorithms that continuously adjust quotes based on order flow, volatility, and inventory. If you’re building a setup, you can register accounts on major exchanges to access API trading and rebate/maker programs — for example, register with Binance, MEXC, Bitget or Bybit using these links: Binance registration, MEXC invite, Bitget referral, Bybit invite.

Automated market makers (AMMs) and liquidity pools (DEX)

On decentralized exchanges (e.g., Uniswap, SushiSwap), market making is performed by liquidity providers who deposit token pairs into pools. Prices are determined algorithmically (common formula: x*y=k). Features:

No traditional order book: Trades execute against the pool.
Fees earned: LPs earn a share of swap fees proportional to their pool share.
Impermanent loss: LPs can suffer losses relative to holding assets due to price divergence.

For background on AMMs, see the Automated market maker page.

Types of market makers in crypto

Institutional/proprietary market makers: Professional firms using low-latency infrastructure and large capital to quote on multiple exchanges.
Retail market makers: Individual traders using bots or script-based strategies to provide liquidity on smaller scales.
LPs on DEXs (AMM providers): Token holders providing liquidity into pools and earning fees.
Hybrid providers: Entities that make markets on both CEXs and DEXs or use hedging across venues.

Benefits of market making crypto

Improves price discovery and market efficiency.
Reduces slippage for traders by increasing depth at prices near mid-market.
Generates steady income for market makers via spreads and fee rebates.
Supports new tokens by bootstrapping liquidity, improving on-boarding and user confidence.

Detailed example: Simple market making profit calculation

Example scenario on a CEX for BTC/USDT:

Mid price: 50,000 USDT
Place bid at 49,950 and ask at 50,050 => spread = 100 USDT (0.2%)
Each filled roundtrip earns ~100 USDT (ignoring fees)
If you do 10 roundtrips/day with 0.5 BTC average size, profit = 10 * 100 = 1,000 USDT/day gross

But account for:

Exchange fees or rebates — maker fee could be negative (rebate) or positive.
Adverse selection — if price moves sharply against you, you may buy high and sell low.
Inventory imbalance costs — capital tied up and funding costs.

Risks in crypto market making and how to manage them

Market making is not risk-free. Main risks include:

Adverse selection: Being picked off when price moves quickly against your quotes. Mitigation: dynamic spreads, quote cancellations, and protection thresholds.
Inventory risk: Accumulating large directional positions. Mitigation: inventory rebalancing, hedging on derivatives, use of delta-neutral strategies.
Execution and latency risk: Delays can cause stale pricing. Mitigation: colocated servers (for firms), fast APIs, smart order routing.
Exchange counterparty risk: Exchange outages or withdrawal restrictions. Mitigation: diversify across venues and maintain off-exchange custody for reserves.
Impermanent loss (DEX): Loss vs. holding assets when prices diverge. Mitigation: choose low-volatility pairs, active pool rebalancing, or impermanent loss protection products.
Regulatory risk: Some jurisdictions restrict market making or impose licensing. Mitigation: consult legal counsel and adhere to local regulations.

Practical setup: Tools, technology and the workflow

To start market making crypto you need technology, capital, strategy and monitoring. Typical stack includes:

Exchange accounts with API access: Open accounts and apply for higher API rate limits if required. Helpful links: Binance, MEXC, Bitget, Bybit.
Trading bot or algorithm: Software to place, refresh, and cancel orders automatically (open source options or commercial market making bots).
Real-time market data: Streaming price, order book, and trade data.
Risk & monitoring dashboards: Track P&L, inventory, open orders, and abnormal events.
Backtesting environment: Test strategies against historical order book and tick data to validate profitability and robustness.
Alerts & automation: Integrate TradingView alerts and automated workflows; for Bybit TradingView automation and alerts setup, see this guide: Bybit TradingView alerts setup and automation.

Seven actionable market making strategies

Top-of-book quoting: Place small-sized aggressive quotes near best bid/ask to capture spread often. Good for high liquidity pairs.
Layered quoting: Post multiple levels on each side at incrementally wider spreads to earn fills across volatility regimes.
Inventory-based skewing: If long, skew quotes to sell more aggressively than buy (shift ask closer, bid further away) to rebalance.
Cross-exchange hedging: If you get filled on one exchange, hedge the position in another market (e.g., perpetual futures) to stay delta-neutral.
Volatility-adaptive spreads: Widen spreads when volatility rises and tighten when market calm — reduces adverse selection.
Maker-taker thresholding: Participate in markets where maker rebates outweigh fees for your typical fill rates, optimizing pair selection accordingly.
DEX LP optimization: For AMMs, provide liquidity in stablecoin-stablecoin pairs or use concentrated liquidity products (e.g., Uniswap v3) to increase capital efficiency with controlled price ranges.

Choosing assets and exchanges — practical tips

Which pairs and venues to choose depend on your capital, technical edge and risk appetite:

High-volume pairs (e.g., BTC/USDT, ETH/USDT) provide steady fills but higher competition.
Low-liquidity altcoins can offer larger spreads but also larger risk and irregular fills — see curated altcoin guides for research and selection: Best altcoins to buy on Coinbase — strategy guide.
For derivatives hedging, use exchanges with deep perpetual markets and low funding costs.
Consider fee structures: some exchanges pay maker rebates; others have flat maker fees. Factor this into your spread and sizing models.

Operational considerations and best practices

Start small: Run small-sized live tests before scaling. Simulate production environment to validate latency and APIs.
Backtest and forward test: Historical simulations help identify edge and worst-case scenarios.
Monitor for outages: Exchanges sometimes experience downtime. Have kill-switches and safety checks to cancel orders if connectivity is lost.
Tax and compliance: Keep detailed records for trades. Consult tax advisors on reporting liquidity provision income.
Documentation and playbooks: Define rules for emergency actions (market crash, exchange hack, flash events).

Advanced considerations: latency, co-location and market microstructure

Professional market makers invest in low-latency infrastructure because microseconds can affect profitability in ultra-competitive markets. Topics to consider:

Smart order routing: Distribute quotes across multiple venues and route orders to the best execution path.
Latency arbitrage: Be cautious — strategies that exploit latency differences require sophisticated infrastructure and may be regulated or contested.
Order flow analytics: Use order flow signals to infer informed traders and adjust strategy dynamically.

Decentralized market making (AMMs) — tips and pitfalls

If you’re providing liquidity on DEXs, consider these specifics:

Impermanent loss (IL): Evaluate IL calculators and understand how divergence affects returns. Tools and studies on IL can help quantify when fees offset losses.
Gas and transaction costs: On some chains, transaction fees can eat into LP returns; layer-2 or chain selection matters.
Concentrated liquidity: Uniswap v3-type pools let LPs concentrate capital in a price range, increasing efficiency but requiring active management.
MEV and sandwich attacks: Be aware that front-running and adverse on-chain behaviors can reduce gains or cause losses.

Real-world example: Combining order-book market making with DEX strategies

A practical hybrid approach is to make markets on a CEX for order flow while providing passive liquidity on a DEX for fee income. For instance:

Run a CEX quoting bot on BTC/USDT to capture tight spreads and arbitrage across exchanges.
Maintain a DEX LP position in a stablecoin pair (e.g., USDC/USDT) to earn swap fees on low-volatility trades with minimal IL.
Use derivative hedges to neutralize directional exposure accumulated on the CEX side.

Managing both strategies requires automated monitoring. If you trade on Bybit and need to understand how to cancel spot trades or manage orders safely, this step-by-step guide is helpful: How to cancel spot trade on Bybit — step-by-step guide.

Regulation, ethics and market integrity

Market making must be done ethically and in compliance with local laws. Market manipulation (spoofing, layering) is illegal in many jurisdictions. Keep detailed logs and implement checks to ensure your algorithms do not inadvertently engage in manipulative behavior. For regulatory context on trading rules and market manipulation, consult official resources such as the U.S. Securities and Exchange Commission (SEC) and equivalent local authorities.

How to get started — a practical 8-step checklist

Learn the basics: Study market microstructure and market making theory (Investopedia and Wikipedia are good starting points).
Choose your capital and allocation: Decide how much capital you dedicate to market making vs. hedging reserves.
Pick exchanges and pairs: Open accounts (links above) and target pairs with adequate volume and fee advantages.
Set up API keys: Configure secure API keys with restricted permissions (trading only, where appropriate).
Acquire or build a trading bot: Use open-source bots or develop a custom algo incorporating inventory and spread logic.
Backtest and paper trade: Validate strategy across historical data and simulated fills.
Deploy with strict risk controls: Use position limits, circuit breakers, and automatic order cancellation on anomalies.
Monitor and iterate: Review P&L, fill rates, and adapt to market regime changes.

Learning and resources

To deepen your practical skills:

Study market microstructure literature and algorithmic trading textbooks.
Practice with TradingView alerts and automation — see the Bybit TradingView integration guide above for automating signals.
Read actively curated asset research before market making on low-liquidity altcoins; a strategic altcoin guide can help determine which tokens to target responsibly: Best altcoins to buy on Coinbase — strategy guide.

When market making is not a good idea

Market making may not be appropriate if:

You lack sufficient capital to buffer sudden directional moves.
Your latency or API reliability is poor (you’ll be vulnerable to adverse fills).
Regulatory restrictions in your country limit market making or require licensing.
Pairs exhibit extreme illiquidity and erratic behavior; the risk/reward may be unfavorable.

Summary — key takeaways about what is market making crypto

Market making crypto involves providing liquidity by continuously quoting bids and asks on exchanges or adding liquidity to DEX pools. It can generate steady returns from spreads and fees but carries risks like adverse selection, inventory exposure, impermanent loss, and operational failures. Success requires robust technology, careful asset selection, sound risk management, and adherence to ethical and regulatory standards.

If you’re ready to explore live markets, ensure your account setups and automation are correct. For practical automation and alerts on Bybit see this setup guide: Bybit TradingView alerts and automation strategies, and for order handling on Bybit reference the cancellation guide: How to cancel spot trade on Bybit.

Useful external references

If you plan to open accounts to experiment with market making or liquidity provision, use the official exchange registration links provided earlier to ensure you are dealing with trusted platforms: Binance, MEXC, Bitget, Bybit.

Market making can be a rewarding activity but requires discipline, capital, and continuous improvement. Start with education, simulate thoroughly, and scale only after proven performance under different market conditions.