In early August 2019, the pan-Asian cryptocurrency exchange Coineal, which is currently actively expanding its presence in Russian cryptocommunity, announced its entry into a strategic partnership with the technological startup BlockchainHouse, which provides unique services for our market: the company is specialized in the field of market-making (MM) for blockchain projects.
This cooperation is very important for both companies: Coineal, which is in the top of 10 world exchanges according to Coinmarketcap, provides a wide package of services to startups planning to enter the big market (especially the Asian market), and this package of services includes support for IEO (Initial Exchange Offering) – the primary exchange placement of tokens, a more modern analogue of ICO, as well as classic token listing service. Exchange is maintaining a safe, professional and convenient environment for its users to trade crypto assets and therefore market-making support is extremely important to maintain the one of the most loyal and at the same time reliable world exchanges reputation.
Coineal offers a listing in a package with a professional market-making service, which can include a variety of strategies for working with the price of the token, in accordance with the marketing strategy of a particular project, with the working strategy for the community and developing the product/services of the project.
As for BlockchainHouse, the company has been providing market-making services since 2016 – during that time it has accumulated significant and largely unique practical experience, established personal contact with top managers of crypto-exchanges, which count already more than 50 connected to its trading bots. Commissions for transactions on partner exchanges are either reduced or completely absent. BlockchainHouse company has its own research Department. The company manages clients' assets on exchanges in the trading volume equal to 150 million USD per day.
Within the framework of cooperation, projects that have made a listing or plan to be listed on Coineal will have access to technical and analytical resources of BlockchainHouse. In turn, BlockchainHouse will offer its current and potential customers a listing and MM support on Coineal.
In this article, Coineal and BlockchainHouse jointly talk about what market-making is, what its practical use is and what is wrong with the lack of understanding the importance of this institution for crypto market.
Liquidity is the most important quality of a market asset
The economic concept of liquidity implies the ability of assets to be sold quickly and at market price. A liquid asset is an asset that can be quickly converted into money. On the crypto market, like on any other, liquidity is something that matters as high as a PR campaign and product development, because without it, your token simply might not start trading.
If we talk about the lack of liquidity, of course, we do not mean the top 20 cryptocurrencies that are present on the market. Difficulties in this sense expect smaller tokens, for which it is vital that other market players – crypto-exchanges and investors – contribute to their liquidity. For their part, crypto-exchanges and investors want to have a guarantee of asset liquidity in order to participate in its turnover on the market. All this creates a kind of vicious circle.
It is not a secret that many IEOs and projects that list their tokens and bring them to secondary trading, lack liquidity. However, in traditional financial world there is a tool to help achieve it. The fact is that this situation is not unique to only cryptomarket. This is the case for any new exotic assets. The reason why the lack of liquidity is not so common in traditional capital markets is that there is a whole industry helping to solve this problem. It is called market-making.
“Liquidity is the ability to exchange money for assets and back without significant transaction losses: narrow spread, low commission,” says Alex Gladskikh, co-founder of BlockchainHouse. “One of the tasks of market-making is to provide liquidity, that means filling the glass with requests both in volume and depth, fulfilling the requests of participants with a narrow spread.”
Who are market-makers and why do we need them?
Market-makers can be called an invisible hand, managing financial markets. Whatever asset you buy or sell, the probability that you are trading against one of them is extremely high. Market-makers are authorized market participants that provide liquidity, and their profit depends on the spread, that is, the difference between the buy and sell price received from a large volume of transactions.
Why do we need market-makers? Let's imagine a traditional exchange with trades. The assets of promoted and well-known brands are of great interest, while there are no such live auctions for small and start-up companies. They are out of the focus for most investors. Market maker enters the game in order to ensure that the assets of these companies are not sold for nothing, are shown with a fair price, and he does not give individual speculators the opportunity to bring down the price to some meaningless minimum. If this was the case, the liquidity of many assets in the market would be prohibitively low. So, market makers take care of liquidity and market concern.
"Without the work of a market maker, the spread on trading pairs can reach up to tens of percent, which negatively affects your coin trade. With the help of market makers and trading bots, we align the spread, which positively affects the decision to purchase a coin/token by a trader or investor, which gives the coin an investment attractiveness," Alex explains.
“That is why the exchange is primarily interested in the fact that market makers work on it and therefore gives them privileges – as a rule, a reduction in trading fees, in exchange for which market makers comply with the established obligations to maintain liquidity in the market,” says Evgeny Egorov, head of Russian representative office for Coineal Exchange.
Why do crypto markets lack liquidity, and what trap do IEO/listing projects fall into in this sense?
"The first need for market-making begins with listing coins on the stock exchange,” says Mikhail Filippov, co-founder of BlockchainHouse. “Exchanges are forced to demand a certain amount for your coin; if this requirement is not met, the exchange divides your coin once and for all. The order book is one of the main factors in a trader's decision to buy a token. Without market maker participation the order book looks empty and has long time intervals between transactions, which will certainly alienate the trader from buying.”
Token issuers conducting IEO are often faced with great difficulties when trying to get a listing on an exchange. Large exchanges can charge huge fees for listing – it can even be seven-digit amounts, very significant for young companies.
In turn, for cryptocurrency exchanges, the new listing is associated with costs and risks: they need to make an examination, audit, set up cold storage and many other processes, and therefore the prospects of listing a new token do not cause a priori great delight for the exchange, if it is not sure in its potential liquidity. It is very unprofitable for the exchange if tokens are present on its platform, which practically are not traded and groups of disgruntled investors try in every way to get rid of the remaining tokens.
“Large exchanges are certainly demanding in the choice of projects,” Alex says. “You can start a dialogue about the listing with them only if the coin of the project is on Coinmarketcap and is present on the entry-level exchanges. Coinmarketcap is generally one of the main analytical tools for the trader. This site is very carefully suited to the decision on the placement of the project. It is believed that the coins, which are not on Coinmarketcap, acquire the status of the most risky investments. Most of the traders will not even consider purchasing such a coin. Conditions for listing coins on Coinmarketcap – is the presence of at least three exchanges from the list of the site and the daily volume of at least 100 thousand dollars.”
For their part, investors also see the lack of liquidity as a big problem. In an illiquid market, even a single investor can bring damage to trade, which will cause half of the stop loss orders to life, and this in turn will lead to a panic sale – small investors are easily panicked. In this case, even a sudden increase in the value of not liquid token can lead to hyperventillate, a sudden rally and further charges that the cost of the token was loaded.
How market makers can help to solve the liquidity problem in the IEO market
Market makers are needed in the crypto market: so far, it has not settled down, and professional investors on it are much less than on the traditional one. If the IEO uses the services of a professional market maker, it works like some kind of magic in relation to its token.
In the process of listing such a token, exchanges behave more relaxed. Simply put, if IEO/listing uses the services of market makers, then the exchange has one less problem. If an exchange knows that the project is provided with market-making services, it is more likely to take a smaller fee for the listing.
High liquidity draws attention to the token of more sophisticated and professional investors. The smaller is spread on your token, the cheaper it is for the investor to trade this asset. If an asset is liquid in a market, the failure of large orders in relation to it is absolutely excluded, and this is credible. So having a market maker in the IEO/listing project helps him not only to get a listing on crypto-exchange, but also to attract the interest of new investors, including institutional ones.
Thus, a crypto project conducting an IEO or listing must include the services of a professional market maker in its budget planning. Success awaits those who initially realize that the requirements for a successful and credible project include marketing, advertising, community building and market making. Taking into account the significant impact that market makers have on the release of new tokens for trading – on the liquidity of assets and their availability on the market – most likely, market makers will soon act as a kind of guarantee that a project is serious, legitimate and profitable for cooperation.