4 Common Strategies that Crypto Market Makers Use

Crypto market makers play a vital role in maintaining liquidity, efficiency, and stability in digital asset markets. These professional companies employ different business models and sophisticated strategies to capture opportunities from trading volume, market volatility, and the bid-ask spreads while carefully managing associated risks. In the end, a more active market presence is one of the core differences between a crypto market maker and a liquidity provider.

There are four widely used crypto market-making strategies:

1. Bid-Ask Spread;
2. Dynamic Spread Adjustment;
3. Arbitrage Trading;
4. Order Book Scalping.

Each of these strategies comes with distinctive mechanics, practical contexts, and key considerations that we break down in detail below.

1. Bid-Ask Spread

A strategy known as Bid-Ask Spread Quoting involves two-way quoting, i.e., posting both buy and sell orders at a fixed distance around the market’s mid-price. It consistently captures profits from the bid-ask spread in stable or low-volatility markets, making it fit for market makers seeking predictable, low-volatility returns. This crypto market making strategy significantly contributes to market depth and order book stability by ensuring that liquidity is available at any time to all the participants.

However, Bid-Ask Spread Quoting becomes problematic during heightened volatility, where crypto prices can quickly move past set order limits, causing adverse executions and increased inventory risks. Thus, effective risk management tools and real-time market monitoring are essential for a crypto market maker to quickly adjust or halt quoting during volatile market conditions.

2. Dynamic Spread Adjustment

Dynamic Spread is a quantitative strategy commonly used by crypto market makers. Unlike static quoting, it dynamically adjusts buy and sell prices around a benchmark, often a moving average (or other technical indicators), based on real-time volatility, trading volume, or order flow signals. The core idea is to widen spreads during turbulent market conditions to prevent adverse price moves and tighten them in stable periods to capture more trading flow and maintain competitiveness.

Beyond simply adjusting spreads, an effective Dynamic Spread Adjustment strategy also requires crypto market makers such as DWF Labs to maintain rigorous inventory management, limiting position sizes to control risk and avoiding accumulation of unwanted exposure when markets trend strongly in one direction. Advanced implementations may factor in multiple parameters.

While this crypto market making strategy can enhance profitability by exploiting micro-movements and reacting to evolving conditions, it is not without risks. Accurate and low-latency measurement of market volatility is essential: any lag or miscalculation can result in adverse selection and loss. Inventory risk also increases if the strategy cannot adapt quickly enough during sustained trends. In highly fragmented or ‘thinly’ traded crypto markets, order execution slippage and market impact can further erode profitability.

3. Arbitrage Trading

Arbitrage is a trading strategy popular for its relative simplicity, also widely used by crypto market makers. It involves simultaneously buying and selling an asset across different markets or exchanges to exploit temporary price discrepancies. The strategy significantly contributes to market efficiency by aligning prices quickly across fragmented trading venues, stimulating a uniform price discovery process.

Arbitrage trading is especially applicable in crypto markets, where liquidity disparities or latency differences frequently create short-lived arbitrage opportunities. The rising popularity of decentralised trading and liquidity provisioning in DeFi protocols and platforms contributes to fragmentation of the crypto market, albeit temporarily.

However, crypto market makers must manage several risks, including execution speed, transaction costs, and counterparty risks when performing arbitrage trading strategy. Opportunities vanish rapidly, making robust technology and real-time execution capabilities essential, alongside thorough monitoring of market conditions and trading processes.

4. Order Book Scalping

Order Book Scalping is a high-frequency crypto market making strategy that implies continuously placing and adjusting numerous small-limit orders very close to the market’s mid-price, aiming to capture profit from minimal and frequent price fluctuations.

A crypto market maker uses this strategy to exploit the microstructure ‘noise’ of actively traded tokens by repeatedly earning tiny spreads that accumulate into significant returns over time.

However, while scalping, crypto market makers must be able to dynamically react to rapidly shifting order book conditions: not only tracking price but also order book depth, liquidity imbalances, and sudden surges in trading volume. Inventory management becomes vital since continuous scalping can unintentionally build up directional exposure if the market suddenly trends, exposing the trader to potentially outsized losses.

The profitability of order book scalping is fiercely contested: exchange fees, rebates, and maker-taker pricing models can heavily impact net returns, meaning that many ‘winning’ trades may not be profitable after costs are factored in.

While the order book scalping strategy can deliver consistent micro-profits in highly liquid digital asset markets, it is operationally demanding, highly competitive, and carries risks that are easy to underestimate. Only a crypto market maker with leading-edge technology, deep market microstructure knowledge, and adaptive risk management such as DWF Labs can sustain success over time.

Inventory Risk Management Is a Must

Whether a professional crypto market maker applies one of the basic strategies described above or a custom one, it always takes risks involved. One particular risk for crypto market makers is inventory imbalance. Thus, they strive to skew bid and ask quotes to drive trades that rebalance inventory to neutral levels.

For instance, market makers narrow bid quotes when holding a net short inventory (i.e., sold more than bought) to attract buys and reduce imbalance. This strategy allows for consistent crypto liquidity provisioning without stepping entirely away from the market, managing the balance sheet.

However, over-skewing can inadvertently signal inventory positions to competitors, reducing fill probability. Calibration and continuous monitoring are necessary for crypto market makers to maintain competitive quoting while mitigating inventory risk, particularly in a volatile market that is digital assets.

Read more about hedging strategies crypto market makers use to address common risks.

Closing Thoughts

Learning about the trading strategies reveals that crypto market making services isn’t about effortlessly generating profits through opaque or effortless financial maneuvers, despite the common beliefs. Instead, it involves substantial effort, meticulous strategy building, and significant technological investment by dedicated teams of professionals.

Market makers are crucial in ensuring a lively, liquid cryptocurrency market, profiting from healthy, organic trading activities rather than engaging in market manipulation. Their primary goal remains fostering a fair and balanced trading environment, where both individual traders and institutional investors can confidently participate.