Crypto market makers play a crucial role in providing liquidity by consistently placing buy and sell orders. Learn more about how they work here.

The cryptocurrency market is notorious for its high volatility and sometimes low liquidity, making it a challenging environment for traders and investors. Executing trades can be difficult, often resulting in significant price 

Market making is a strategic approach that provides the necessary liquidity to stabilize markets, ensuring smoother trades and reducing volatility. By creating buy and sell orders around the current market price, market makers help maintain a healthy trading ecosystem. This article examines the fundamentals of market making, its benefits for traders and exchanges and the way it enhances the overall efficiency of the cryptocurrency market.

A crypto market maker is an entity or individual who primarily provides liquidity in cryptocurrency markets by continuously placing buy and sell orders for digital assets. This activity ensures efficient trading and helps maintain stable prices.

Crypto market makers play a key role in keeping markets liquid by continuously placing buy and sell orders on exchanges. Here's a closer look at how they operate.

Key Characteristics of a Crypto Market Maker

Crypto market makers provide liquidity and stabilize prices in the cryptocurrency market. The following are the key traits that enable them to operate effectively.

Market makers continually place buy and sell orders, ensuring the availability of transactions for traders. This constant availability reduces wait times for trades and minimizes the price impact of large orders, making the market more efficient and accessible for everyone.

One of the fundamental roles of market makers is that of managing the bid-ask spread. By consistently quoting competitive prices, they narrow this spread, thereby enhancing trading efficiency and reducing costs for other market participants. This spread is also their primary source of profit.

Market makers leverage advanced algorithms and HFT strategies to analyze market conditions and optimize their order placements. This technology allows them to react swiftly to price changes and maintain a balanced inventory of assets, which helps to manage risk and maximize profitability.

Due to the inherent volatility of cryptocurrency markets, effective risk management is vital for market makers. They employ various techniques, such as hedging and real-time market analysis, to minimize exposure to sudden price swings. This ensures their operations remain stable even in the face of market fluctuations.

By providing continuous liquidity and facilitating smooth trading operations, market makers enhance overall market efficiency. Their presence attracts more traders, which increases transaction volumes, boosts exchange activity and contributes to a healthier trading environment.

Given the quickly evolving nature of the cryptocurrency landscape, market makers must be adaptable, continually refining their strategies in response to new technologies, regulatory changes and shifts in market dynamics. This ensures they remain competitive and relevant.

Crypto market makers play a critical role in the cryptocurrency ecosystem by providing liquidity and stabilizing prices. Despite the integral role they play, however, their operations come with both advantages and disadvantages. 

Additional Importance of a Crypto Market Maker

Crypto market makers play a vital role in maintaining the efficiency and stability of the cryptocurrency market. Their presence on crypto exchanges ensures trading environments operate smoothly. 

Newer and smaller cryptocurrencies often struggle with liquidity. Market makers provide a market for these assets, promoting their growth and creating a more diverse and dynamic crypto ecosystem.

Through continual quoting of prices, market makers aid in fair price discovery, ensuring that cryptocurrency prices reflect actual market demand rather than extreme fluctuations. This promotes a more trustworthy and transparent trading environment that allows traders to make data-backed decisions. 

Crypto market makers are essential players in the cryptocurrency ecosystem, providing liquidity, stabilizing prices and ensuring smooth trade execution. Their use of advanced algorithms and real-time order placements encourages a more efficient, accessible and fair market. However, risks such as market manipulation, potential capital loss and lack of regulation can be problematic. Overall, the role of market makers in supporting emerging assets and maintaining market stability makes them indispensable for a healthy and growing crypto environment.

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Crypto Market Maker: Boosting Trades With Strategic Liquidity

SEC Chair Gary Gensler announced he will resign on January 20, 2025, coinciding with President-elect Donald Trump's inauguration.

The S&P 500 rose 0.53% as investors shifted toward cyclical stocks expected to benefit from a strengthening economy, while technology shares lagged. Coindesk Indices, an index measuring broader cryptocurrency market performance was up by 4.79%, with Bitcoin and Ether rising by  4.19% and 8.75%, respectively in the past 24 hours.

Today's top performer is XRP, which surged 24.3% following the partnership between Ripple and MCSocialVenture to boost financial resilience and access in emerging markets.

Ripple (XRP), launched in August 2012, is a blockchain technology company focused on improving international payments with its cryptocurrency, XRP. 

, focused on investing in emerging market entrepreneurs. The initiative will pilot financial resilience and humanitarian solutions built on the XRPL, aiming to advance equitable access to finance.

Check Out the Latest Prices, Charts, and Data of 

 he will resign on January 20, 2025, coinciding with President-elect Donald Trump's inauguration. Gensler, whose term runs until 2026, faced pressure from the crypto lobby due to the SEC’s strict regulatory actions against the industry, including high-profile cases against Coinbase and Binance. Gensler’s departure is seen as a victory for crypto advocates, who hope the next SEC chair will be more crypto-friendly. Trump has hinted at firing Gensler on his first day in office and is expected to appoint a chair with expertise in crypto, such as Mark Uyeda, Hester Peirce, or Chris Giancarlo.

Yesterday, BTC Spot ETF data revealed a net inflow of $396.7 million, driven by $404.5 million from non-GBTC sources, partially offset by a $7.8 million outflow from GBTC..

 for those who participated. To claim, visit 

 using code B0FKOP. Additionally, Morph Zoo Season 2 has launched on mainnet, allowing users to earn points by bridging ETH or executing transactions on Morph. The Bitget Wallet offers a 1.2x multiplier on points to maximize rewards.

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SEC Chair Gary Gensler to Resign on Inauguration Day, Marking a Win for Crypto Lobby

Traders seem to expect BTC’s momentum could slow down a bit after the price hit over $97,000.

Positive sentiment has continued to fuel the cryptocurrency market as the expectation of further institutional adoption of 

 keeps growing. Options trading of BlackRock’s Spot Bitcoin ETF IBIT 

 with a bang, attracting almost $2 billion on the first day of trading. The hope of more spot ETF derivatives to change the market structure with additional institutional money onboarding crypto is high.

, we explored the possibility of the market being overleveraged, which could be painful if the current leverage unwinds. Data from CryptoQuant shows that the estimated leverage of the current BTC markets has reached another YTD high.

Derivatives data on Bybit shows that traders seem to expect that BTC’s momentum could slow down a bit after the price hit over $97,000, and are focusing more on downside protection.

Figure 1: Bitcoin estimated leverage ratio at 0.23. Source: CryptoQuant

BTC Options Open Interest Returns to Previous High While Perps Are Catching Up

Derivatives traders have been actively participating in BTC markets as 

 on Bybit has surged to over $3 billion, on par with the previous high on Nov 14, 2024. Although the options OI has increased, it still hasn’t surged above the previous high. At the time, BTC’s price had already jumped to over $97,000. If the OI doesn’t follow suit and break above the previous high in the coming days, this could be a sign that the market could become a bit exhausted — something for all market participants to be aware of.

Figure 2: Daily open interest for BTC options on Bybit. Source: Bybit

 have also seen increased open interest in recent days. Perpetuals have been among the most favorable products for day traders and short-term speculators. Rising open interest could indicate that more traders are looking for short-term profit, which could bring additional volatility to the market. 

Figure 3: Daily open interest for BTCUSDT Perpetuals on Bybit. Source: Bybit

Dec 27, 2024 remains the most popular expiration date for BTC Options on Bybit, with most of the open interest there. Within that expiration, $120,000 calls had the most OI, and $100,000 calls accumulated the second-largest OI. 

Figure 4: Open interest by strike for BTC Options with a Dec 27, 2024 expiration. Source: Bybit

Meanwhile, the market’s optimism that BTC will hit $100,000 by the end of the year seems to support the current price momentum. Shorter-dated options could show that traders are also looking for downside protection. The Bybit 

 page shows that BTC Options with a Nov 29, 2024 expiration have a strong 24-hour inflow to $90,000 puts. This could indicate that some traders are also anticipating some degree of price correction by the end of the month. 

Figure 5: 24-hour volume by strike for BTC Options with a Nov 29, 2024 expiration on Bybit. Source: Bybit

 for BTC Options on Bybit also indicates a possible downside protection in play among options traders. A smirk skew, or left skew, is a skew curve that’s steeper on one side (the left side) than the other. Traditionally, a smirk skew curve could mean that traders have been protecting their portfolios against a possible declining market. At the time of this writing (Nov 21, 2024), BTC Options contracts on Bybit with Nov 29, 2024 and Dec 27, 2024 expirations have both shown a smirk skew. However, this doesn’t necessarily mean traders are bearish on the price, and could just be part of the trading strategy. For example, traders could set up collars by buying out-of-the-money (OTM) puts and selling OTM calls simultaneously, so that they can profit in case BTC’s price drops, gain upside exposure and potentially offset the cost of buying the puts. 

Figure 6: Implied volatility of BTC Options with Nov 29, 2024 and Dec 27, 2024 expirations. Source: Bybit

The current BTC leverage trading may be complex, but tells a revealing narrative about market sentiment. The divergence between high leverage and increased hedging activities also reminds us that market dynamics are rarely straightforward, and adopting a 

 seems increasingly important in this diverse market.

: Investing in cryptocurrencies and their derivatives involves substantial risk of loss, and isn’t suitable for every investor. This article provides facts for educational purposes only, and does not represent any financial advice. Prior to making any investment decisions, please ensure you fully understand the risks involved and seek independent advice if necessary. Our customer support team is available to assist you with any inquiries.

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Learn From Smart Money: BTC’s Leverage Remains High as Traders Hedge Against Downside Risks

Our weekly crypto derivatives analytics report dives into macro events, the current state of crypto and trading signals from spot trading volume, and futures, options and perpetual contracts.

Spot prices have jumped significantly in the two weeks following the November 5, 2024 U.S. elections, propelling Bitcoin to new all-time highs, while Ethereum hasn’t kept pace. The implied volatility term structure has inverted again in tandem with these spot price movements, although longer-dated tenors remain relatively stable. Derivatives market indicators reflect strong positive sentiment: perpetual funding rates are consistently positive, open interest in futures contracts is rapidly increasing and options skew remains firmly positive.

Open interest in futures has surged, indicating heightened market participation and a growing interest in leveraged exposure due to recent price movements. Similarly, open interest in perpetual contracts has sharply increased, fueled by rising trader confidence and a growing demand for leveraged positions in light of recent market rallies. Meanwhile, the implied volatility term structure continues to invert in alignment with spot price increases, demonstrating a sustained correlation between spot prices and volatility.

Please check out the report’s highlights.

Futures Open Interest Reaches ATH Along With Price

Perpetual swap open interest has been increasing alongside futures, with a consistent rise in open positions over the past week reaching all-time high activity levels. This trend suggests that traders are actively pursuing leveraged exposure in response to the ongoing spot rallies, aiming to capitalize on the rising spot prices. Notably, there’s been renewed interest in Ethereum (ETH), reflected in rising trading volumes. 

Perpetual swap funding rates have reached exceptionally positive levels, indicating that long positions are confident enough to pay these rates to sustain their leveraged exposure. This trend has consistently been observed across all tokens, with a noticeable rise in funding rates since Nov 10, 2024. The persistently high funding rates highlight the strength of the bullish sentiment, which is also evident in the increasing open interest in futures contracts. This aligns with the recent spot price action, demonstrating significant upward momentum.

Option Volatility Term Structure Inverts 

The implied volatility term structure for Bitcoin has inverted amid the recent spot rallies over the past few weeks, indicating heightened market uncertainty and expectations of imminent price movements. However, levels haven’t exceeded the highs seen before the elections, and longer-dated tenors remain firmly range-bound. Concurrently, open interest in Bitcoin options has risen significantly, with a notable increase in put trading volumes. Open interest in puts has slightly surpassed calls, despite the persistently bullish market outlook indicated by the volatility smile skew.

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Bybit X Block Scholes Crypto Derivatives Analytics Report (Nov 20, 2024): Market Becomes Extremely Positive About Bitcoin as Volatility Curve Turns Invert

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Can the current sky high prices of speculative cryptocurrencies really go higher? Learn how to manage your risk with the greater fool theory.

Around the world, global markets have been awash with liquidity as central banks and governments promote quantitative easing. In some cases, central banks are 

 in purchasing market securities. This flood of money has generally led to higher asset prices across markets, with 

. Higher asset prices can also be attributable to the greater fool theory, as investors keep selling overpriced assets to other investors (the greater fools). In this article, we’ll examine the greater fool theory and evaluate whether it’s a sound investing strategy.

The greater fool theory states that investors in a bullish market can earn positive returns by betting on an asset without regard to its fundamentals, because someone else (a “greater fool”) will buy it from them at a higher price. 

Investors acting in accordance with this theory ignore intrinsic valuations and fundamentals of assets — even if those assets are overpriced — because they expect to profit when another investor (the greater fool) is willing to pay even more. 

What drives a friendly fool to snap up these overpriced assets, sometimes to their disadvantage? Take meme coins, for example. A crypto wallet that bought $8,000 worth of 

 tokens last year is currently valued at $5.4 billion. The meme cryptocurrency hit a new all-time high on the 28th of October 2021 — a price appreciation of over 2,000,000% since the wallet bought the first Shiba Inu. For a token that originally started as somewhat of a joke, Shiba Inu may seem incredibly overpriced. It’s hard to argue that the pricing is in line with any intrinsic value. 

These meme coins thrive on internet-fueled hype, and on the fear of missing out (FOMO). They typically have a sturdy army of devoted followers who popularize the tokens and create a cult-like following online. Once an asset price starts to pump, and more people recount how much profit they’ve made, those who haven’t yet bought jump on the bandwagon, no matter how irrational it may be to do so.

Multi-level-marketing schemes (MLMs) are real-world examples of the greater fool theory in practice. Existing members of MLMs are rewarded by selling products to new members they find, who in turn have to find more fresh buyers. 

A speculative bubble is a sharp increase in asset prices far above what its underlying fundamentals can account for. This situation usually happens because of an exceedingly optimistic outlook about an asset’s price for the future. The speculation and resulting activity which follow push trading volumes higher. As the exaggerated expectations draw in more investors, demand exceeds supply, pushing the price increasingly beyond the asset’s intrinsic value.

Eventually, the bubble bursts, and the asset comes crashing down as investors panic and sell their positions. The greater fool theory is the underlying principle behind speculative bubbles — and it’s also what keeps them going.

Pros and Cons of Using the Greater Fool Theory

Applying the greater fool theory to crypto markets can potentially give you strong returns. You can only be assured of success if you’ve mastered timing the market. Since a price correction is inevitable, and the bubble will eventually burst, the key to using this strategy is exiting a trade early so you won’t be caught holding the bag — as the last fool.

While it is possible to make good returns using the principle of the greater fool, it’s risky — and there are other ways to achieve excellent long-term performance. 

The first problem is that greater fools are often after assets which are trending. They aren’t interested in stable performers with solid fundamentals, but rather in what’s hot right now. As a result, they tend to be impatient with any asset that slows or cools off, even if it’s for a moment. These trend-chasing investors will jump ship at the first sign of trouble, moving on to the next token that makes the headlines. The issue here is that you could be the one left holding the bag when they go.

The crypto market is volatile by nature. A rise in asset prices is usually followed by a fall. So, the second problem of using the greater fool theory is timing — you have no way of knowing when a price correction will start. If you’ve played the wrong hand, you could end up as the greatest fool.

Lastly, using the greater fool theory is time-consuming. To successfully use this strategy, you must be very attentive since prices change rapidly. It’s best to constantly scan the markets, several times a day. This requires a significant investment of time, energy and discipline. Having the speculative and market trend expertise of a full-time day trader could help. 

At the end of the day, using this strategy is like playing hot potato with a grenade. Even though it’s possible to make money, you’re also taking on a fair bit of risk. 

The Greater Fool Theory in Action: Meme Coins

The greater fool theory approach to investing is dependent on someone purchasing your assets for more than you paid, without any fundamental reason for doing so. 

Nothing illustrates this phenomenon better than the spike of 

As of October 30, 2021, Dogecoin had returned 17.79% and 45% in the previous 7 and 30 days, respectively. Even more impressive, Shiba Inu had returned more than 900% over the previous 30 days, becoming one of the top ten traded cryptocurrencies. Its 

 reached $39 billion. The value of Shiba Inu also briefly surpassed that of the 8-year-old 

, which is largely considered its “father.”

Both coins have little underlying value — and yet, they’re making waves and creating crypto millionaires. Although they started as fun projects, they quickly evolved to become a way to make fast returns on investments. 

, and have strong online communities of fans who are active on social media. Social media influencers champion this type of speculation on TikTok, Twitter, and Reddit, etc. People buy because they hope that other people will buy at a higher price from them.

For example, a key factor which helped launch Shiba Inu 

 was a tweet by Tesla founder Elon Musk, in which he shared an image of the Shiba Inu coin on October 18 of this year. Before the tweet, the coin was trading at $0.000026, and afterward, the price jumped to an all-time high of $0.00008456

However, meme coins cannot survive indefinitely based on celebrity endorsement and internet hype alone. Since they have little intrinsic value and no real-life applications, a bubble burst is highly possible. You could experience massive returns — or significant losses, depending on when you jump in or out.

How to Protect Yourself Against Speculative Bubble Bursts

If your strategy is based on the greater fool theory, then you’re fine with buying overpriced assets and selling them for a profit just because “someone will always pay more” (or so you think). Just be aware that you could lose a great deal of money.

A speculative bubble is a fragile one, and buying an overvalued asset without regard to its fundamental value could leave you exposed when the bubble eventually collapses. The sell-off triggers a sharp dip in the asset’s price, and you’ll lose a lot of money if you’re left with no one to sell to.

However, there are several ways to cut your losses if you’re caught up in a crypto bubble.

The greater fool theory’s strategy is a risky one, and is not generally recommended. Successfully implementing a greater fool strategy takes time, effort — and quite a bit of luck. You may also have to pay an excessive amount of attention to the markets, since prices can — and do — change instantly.

Although playing the crypto market based on the greater fool theory could potentially be profitable, there’s also a good chance you could end up being the greater fool. If no other fool shows up, you’ll be left holding the bag.

The Greater Fool Theory: Foolproof Strategy, or Bubble Waiting To Pop?

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