6 Misconceptions about Market Making in Crypto

Because crypto market making happens largely behind the scenes, it is often misunderstood and surrounded by persistent myths. While it is crucial for ensuring efficient markets and smooth trading, several mix-ups distort how market making actually works. In this article, we debunk six of the most common yet misleading narratives, revealing the complex reality behind crypto market makers.

1. Market Makers of Crypto Are Just Liquidity Providers Who Always Profit

There is a widespread belief that market makers simply provide liquidity and continuously earn profits from bid-ask spreads. However, this ignores the significant risks involved. Market makers face inventory imbalances, adverse selection from informed traders, and unpredictable volatility that can erode profits. Therefore, they must actively hedge and manage their positions similar to any other professional trader, as passive liquidity provisioning does not always lead to consistent profits.

Read our article to learn more about the differences between liquidity providers and market makers in the crypto market.

2. Market Making of Cryptocurrencies Is the Same as Traditional Market Making

Many assume that market making in the cryptocurrency market functions just like in traditional finance. In contrast with this popular narrative, there are clear distinctions between the two: crypto markets operate 24/7 without weekends and holidays; they are fragmented across numerous exchanges, and are shaped by unique regulatory and technological challenges. Moreover, a big share of crypto trading is done with unique techniques and software such as decentralised liquidity provisioning and lending protocols, which differ fundamentally from conventional market making services.

3. Crypto Market Making Is Only About Spreads

While capturing the bid-ask spread is central to market making, it is far from the whole picture. The biggest market makers of digital assets such as DWF Labs employ complex crypto trading strategies and advanced risk management systems, which includes arbitrage trading between trading platforms, develop proprietary trading algorithms, software and strategies, and interpret order flow to make informed decisions and earn profit. The simplistic view that it is merely about placing bulk buy and sell orders overlooks these complexities.

4. Market Makers Can Control Movements of Crypto Prices

It’s often thought that market makers can manipulate prices at will. In reality, although large market makers can influence short-term price moves through their orders, crypto’s decentralised and competitive landscape prevents any single player from controlling prices. There are too many factors influencing crypto prices, and black swan events are common. In addition, professional market makers of crypto like DWF Labs, Wintermute and others generally seek to be market-neutral, earning profits from both sides of the order book. They also avoid increased price risk for crypto on their balance sheets.

With everything combined, prices of cryptocurrencies ultimately reflect the aggregated supply and demand from diverse market participants.

5. Market Making Is Easy and Requires Little Capital

The general misconception that market making is an easy way to earn money with minimal investment is misleading. Successful market making demands substantial capital, advanced technological infrastructure, fast execution capabilities, along with continuous risk monitoring and hedging. Increasing institutional involvement and regulatory scrutiny only raise the entry barriers.

The crypto market making space is in fact highly competitive, requiring scale, capital, and deep technical expertise which leaves little room for undercapitalised or inexperienced players.

6. AMMs on DEXs Replace Traditional Market Makers

DeFi popularised unique methods for trading and related operations like liquidity provisioning and market making, creating a completely new field. Automated market makers have gained attention as a new way to provide liquidity in a decentralised manner through algorithmic pools. However, AMMs do not replicate the sophisticated risk management and inventory control strategies employed by traditional market makers. Rather, both models coexist, and future developments may blend elements of each.

Trading volume on decentralised crypto exchanges has gradually soared over the years but only surpassed 20% of the volume on centralised platforms in January 2025. DeFi remains far from replacing traditional trading and its key players, such as centralised market makers.

Conclusion

Market making in crypto is neither a risk-free cash machine nor a relic of traditional finance. It’s a foundational practice requiring expertise, infrastructure, and constant calibration. Dispelling these myths gives us a more honest view of what keeps the crypto markets running. Recognising that market makers are not omnipotent price controllers nor effortless profit machines helps develop a more realistic view of how liquidity and trading function in practice, regardless of public perception.