Liquidity is a core element of an efficient and sustainable financial system.
In a nutshell, liquidity is the ability to easily buy and sell an asset at any time, without causing a drastic change in price. It is especially crucial for young markets and industries, such as crypto and digital assets. Liquid markets are more attractive for investors and traders, which is why token projects and exchanges that can demonstrate the highest liquidity, will inevitably be more successful than the others. This is true on centralized exchanges but also in DeFi.
So, who is a market maker and how can he contribute to the success of a token?
A market maker acts as an intermediary between a buyer and a seller, quoting both parties the price of the token. This ensures liquidity and maintains a sustainable infrastructure for investors and traders.
Liquidity is vital for the survival and overall success of a token or coin. In November, 2020 the BNB token price paired with BUSD fell from $27 to $0,8 on Poloniex exchange when a user placed a sell order for 732 tokens and there was no liquidity to sustain the market price. This abnormal decline in price has been attributed to the lack of proper market making in place for the BNB/BUSD pair at Poloniex at the time. The fact that BNB is one of the top coins by market cap demonstrates how easily a token can collapse without the necessary support.
For all those token projects who are still hesitant about partnering with a market maker we have mapped out 3 reasons why you definitely should!
Planning a token listing on an exchange
Whether you are going through IDO, ICO, listing on decentralized exchanges like Uniswap, Balancer, and Sushiswap or already targeting centralized exchanges like Binance, Coinbase, or Bittrex, negotiating your listing can be tough, especially if you can’t guarantee liquidity from the first day.
Having a market maker helps you to get a token listed. After going through the costly due-diligence and setup process, no exchange wants to be stuck with a dead token with no trading activity going on. Approaching them with a market making partner already in place shows the exchange that you have thought about liquidity and understand its importance. Projects that have very low liquidity will just be delisted in a few months. Because of this, exchanges are the main advocates for market making services. Very often having a market maker is even a non-negotiable condition for the token to get listed.
Attracting more sophisticated investors to you project
If you have ever raised capital you know that what most investors look for is, well, other investors. This is mirrored with publicly traded tokens. Lack of liquidity, trading activity and a wide spread between a buy and a sell price stop traders and investors from engaging with an asset.
Illiquid markets are easily disrupted (remember BNB/BUSD) not only by sellers, but also buyers, which may result in a pump-and-dump situation for illiquid tokens. None of these contributes to a sustainable and trustworthy market.
Having a market maker adds the much needed liquidity to the token and helps to overcome many hurdles. Liquidity always attracts more liquidity and generates trust in the token. Tight spread allows traders and investors to apply more diverse strategies, like arbitrage and high frequency trading, which are impossible in illiquid markets.
In the end, market makers' aid in attracting more sophisticated investors and over time help fuel the volume and the price of your token.
Reviving an old token
The short history of the crypto industry can highlight many cases of a token gaining significant traction only to be ‘sideswiped’ by unforeseen circumstances and find the asset price sitting at $0.000 with almost no trading activity. If that’s the case, don’t play requiem for a token just yet!
Whatever the reason behind the lack of liquidity, if your business is up and running and the token is still listed on an exchange, there may still be a chance that market making can supercharge your token and breathe life back into it. Putting a thorough liquidity strategy in place and combining this with some fresh marketing for the project can in many cases remobilize the community and turn the token into a success story over time.
We at flovtec revive tokens using Octopus - an intelligent self-learning algorithm designed specifically for illiquid tokens.
While liquidity is an important missing piece in the digital assets ecosystem, market makers are the invisible hands that fuel this market.