Understanding Market Making in Cryptocurrency Trading

On the crypto markets, the majority of investors still think quite simply: buy, wait, and hope for an increase.

This logic may have worked, especially in strongly bullish phases. But it does not allow for understanding a fundamental element: what actually drives a market on a daily basis.

Behind each transaction, behind each price movement, there is a less visible but essential mechanism: liquidity.

And this liquidity doesn’t just appear out of nowhere. It is largely provided by specific actors: the market makers.

When we see that liquidity, the spread, and a continuous presence in the order book structure daily life in the markets, the question of portfolio shifts: less guessing the next tick than defining exposure when the regime changes.

The strategy proposed by Neutralis clearly addresses this shift: principles and compromises for a structure aware of regimes, rather than a single directional bet.

The Often Invisible but Central Role

Market making involves constantly offering buying and selling prices on an asset.

Concretely, this means that at any moment, someone is ready to buy slightly below the current price, and sell slightly above. This continuous presence allows other participants to enter or exit the market without delay.

Without this activity, the market would quickly become impractical. Price spreads would widen, executions would be slower, and price movements much more abrupt.

What many perceive as a smooth and natural market is actually the result of a well-maintained structure.

Two Opposing Logics: Trading and Providing Liquidity

Most investors adopt a directional approach. They seek to anticipate a movement, identify an entry point, and profit from a trend.

The market maker, however, does not operate in this manner.

They are not looking to predict whether the market will rise or fall. Their goal is different: they aim to capture the intermediate movements, the continuous oscillations that characterize markets.

Where a trader depends on a scenario, the market maker depends on the movement itself.

This difference is fundamental. It explains why some strategies can continue to work in environments where classical approaches stagnate.

The Heart of the Mechanism: Bid, Ask, and Spread

To understand how market making works, we need to look at the fundamental structure of an order book.

At any moment, an asset has a buying price and a selling price. The former is the best price at which a buyer is willing to enter. The latter is the best price at which a seller is willing to exit.

Between the two lies a spread, which is where all the logic of market making resides.

An actor can buy at one price and then sell slightly higher. Individually, the gain is small. But done continuously, this mechanism becomes a source of returns.

Why Exchanges Depend Directly on Market Makers

Without market makers, an exchange would not function properly.

In a illiquid market, a simple order can significantly move prices. Execution becomes uncertain, spreads widen, and user experience deteriorates.

To avoid this, exchanges encourage, and even reward, market makers.

They ensure a constant presence in the order book, stabilize spreads, and allow for quick execution. In other words, they make the market usable.

A More Organized Structure Than It Seems

It’s easy to imagine the market as a group of buyers and sellers freely interacting.

But in reality, much of the market’s structure relies on actors who organize this interaction.

Today, there are several types of market makers: individual traders using automated tools, quantitative strategies, and specialized companies whose main activity is market making.

All contribute, on their scale, to the functional structure: maintaining an active and usable market.

Understanding these dynamics in detail

A Neutralis conference presents quantitative strategies that exploit crypto volatility while limiting dependence on a single direction.

How This Changes Investing

Understanding the role of market making requires a significant step back.

The market doesn’t spend all its time going up or down. Much of its behavior lies in between. It oscillates, corrects, returns to its levels, and then moves again.

It is within this dynamic that a significant portion of activity is created.

Some investment approaches seek to leverage this reality, rather than solely rely on a continuous upward trend.

This is particularly the case with structured strategies that combine market exposure and mechanisms to exploit price oscillations. A concrete illustration of this approach is available in the Neutralis strategy presentation.

This first article lays the foundation.

But a question remains: how do these actors actually operate in the markets?

In the next article, we will see how market making bots work, and why most of them use grids to exploit volatility.