Markets consist of buyers and sellers. Buyers want to buy bitcoin and other digital assets to make money in the future, sellers want to sell bitcoin and digital assets because of fear or to take profits. Buyers pay a price based on the demand and supply within the particular exchange they go to and use to make their move.
These market participants never worry about not being able to buy because they know that there is someone on the other side who will sell. On the flip side, sellers don’t worry because they know someone will be there to buy.
What if there was an imbalance between the number of buyers and sellers? That would create an illiquid market, an unpleasant scenario for all involved.
Market making is a critical part of the trading picture and it is essential to creating liquidity in the exchanges. A market maker is one entity, it may be a retail individual, a broker, or another institution that will ensure to facilitate purchase or sales of bitcoin or other different types of assets.
For instance, a market maker would assume responsibility in buying stocks and selling stocks to make a market and allow people to trade in a comfortable manner.
Makers must have enough capital invested in different securities present within the exchange to create a foundation and make the market. The entity must hold large portions of each equity or digital asset to create a sufficient market that can sustain substantial volumes of a wide variety of orders in the marketplace.
Remember that when different exchange participants are selling, someone must be there to make the market and be at the other end of the trade, in essence, someone must buy when other parties sell. Further, entities must be in place to sell when market participants expect to buy large quantities. Also, the makers must make sure to sell or buy at reasonable prices.
It is undoubtedly not easy being a market maker, that is why bots can help to implement this strategy.
These entities must always be there, during times of slow activity, fast activity, and medium paced markets. They must be the ones to buy assets when others are panic selling, and they must be the ones to sell when others are panic buying.
The buck stops with the market makers, and they facilitate transactions on both sides.
Firms such as Bitmex have built out their operations around this simple principle of market-making.
How Can This Be Used for Bot Trading?
Market making can be seen as a comprehensive trading design wherein an exchange participant, will, at the same time, input acquisition and divestment orders into a system. The trader will do so to earn money on the difference between what is known as the bid-ask spread. This applies to bitcoin and any other cryptocurrency.
Please remember one critical component in this trading strategy, that the market maker is providing overall liquidity. They take full responsibility for making purchases and also factoring in sales into the picture.
Finally, remember that you, as an individual would not be doing this, you would use a bot to conduct market making more efficiently.
TOP TRADING BOTS
A Market Maker Bot Example
Let’s take an institution, and we’ll call it, CyberTrucks. CyberTrucks sees an opportunity, steps into a market, and connects a market maker bot.
CyberTrucks would set up the automated trading tool software, then go to a specific exchange such as Binace, and finally choose a trading pair such as Bitcoin/USDT.
The firm looks at the current trading price of bitcoin through the order book and notices that it is at $10,000 per full unit. CyberTrucks would then initiate the bot and order it to make a purchase for $9,999 and then instruct it to conduct a sale at $10,003.
It would place the buy order slightly below the current trading price, and then one sell order right above the current selling price.
Did you see what happened? CyberTrucks via their bot would make money on the bid and ask spread, or a whole three dollars when both orders are finalized.
Now imagine that CyberTrucks will use this automated trading market maker strategy on a higher volume or a wide variety of price differences.
CyberTrucks would be rolling in the money provided that each bid and ask or purchase and sale price are executed accordingly.
But it is important to note a couple of essential items, in this scenario, they must have the units to sell, and they must have the capital to buy the units. This is a crucial component that we will talk about a bit later on.
Advantages of This Strategy
Depending on the trading environment, this can be a very sound strategy. You will notice that market makers earn money from the spreads in the bid and the ask, between what they buy it for and what they sell it for.
It is this simple principle that may make it a very sound strategy. For you see, market makers are not interested in where the price is going in the future but more the difference between the buy and the sell of the digital commodities.
Hence the advantages are that it is tried and tested and are continuous by nature in the right markets.
Disadvantages of This Strategy
The strategy can be perilous because of the number of units one entity would have to hold to facilitate the buy side and the sell side properly. Remember that a market maker bot makes money from the bid and ask, this means they are performing both activities simultaneously.
So what happens when the market falls rather drastically? The units which they purchased now drop down in value substantially.
When Is the Perfect Time to Use It?
The perfect time to use an automated market making bot is when the market is trading sideways or flat. For example, you might have noticed at different periods in recent history, and throughout bitcoins history, the coin traded at a specific price point and range for quite a while.
It might have traded at the $3,000 range for a couple of months, then $8,000 for a few months with minimal volatility. It is in these times where one can take advantage of the bid and ask spread and earn money throughout the process.
Experts also note that traders will want to use this strategy during a cryptocurrency market uptrend as well. One would usually shy away from using this strategy within a bear market due to overall negative sentiment.
Conclusion
Traders should be aware of this strategy and understand the market, current prices, target prices, the trade amount, the price offset, the marker fee, reset timeout, secondary orders, and price offsets when tapping into the crypto market.
Always account for fees and how they will eat into your profits, only then will you earn and generate substantial gains over time.