Do crypto market makers actually manipulate the market?
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Do crypto market makers actually manipulate the market?
Market makers, at the top of the food chain in the crypto industry, are not guaranteed to be profitable and also face market risk and liquidity risk.
Navigating Web3 tides with focused insightsAuthor | Day
In the crypto industry, behind the sharp price fluctuations of certain tokens often lie market makers. As hidden "market makers," they are frequently accused by the crypto community of "manipulating the market." Recently, the highly anticipated launch of Worldcoin was revealed to have signed agreements with market makers, lending tokens to five market-making firms to provide liquidity for WLD.
Today, let's take a brief look at the mysterious "market makers."
01 What Are Market Makers?
To understand market makers, we first need to grasp the concept of liquidity. If an asset can be fully and quickly sold, we say it has good liquidity. Conversely, if an asset can only be sold at a discount or takes considerable time to sell, it lacks liquidity. Liquidity describes how easily, quickly, and inexpensively buyers and sellers in a market can conduct transactions. Just like pools on DEXs—when purchasing the same amount across different DEXs, the quantity obtained may vary between UNI and CRV, or selling the same amount yields different proceeds—that difference is liquidity. We should understand that a project’s liquidity quality directly determines its survival. Without liquidity, a project is effectively
dead. Projects rush to list on major platforms (which signals positive momentum) because listing enhances liquidity and expands their potential user base.
One of the primary roles of market makers—the focus today—is providing market liquidity. Many market manipulations are also executed based on liquidity.
The concept of market makers originates from traditional securities markets but applies equally well in crypto markets, where they play multiple critical roles vital to market development and operation.
Key functions of crypto market makers include:
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Providing Liquidity
Market makers continuously quote bid and ask prices, creating a high-liquidity environment that enables fast execution, lowers transaction costs, and increases participation.
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Maintaining Market Stability
During market volatility, market makers balance supply and demand by adjusting quotes and trade executions, preventing extreme price swings and ensuring a more reliable trading environment.
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Promoting Market Development and Maturity
By supplying liquidity to early-stage projects, market makers enhance market attractiveness and tradability, drawing more investors and fostering market growth and maturity.
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Providing Advisory Services
As key market participants, market makers accumulate vast market data and insights valuable to clients, helping them make better investment decisions.
Market makers serve several main types of clients:
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Trading Platforms: Exchanges require liquid markets to attract more investors and capital.
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Institutional Investors: Institutions often execute large trades requiring substantial liquidity support. Market makers help them implement strategies efficiently and reduce costs.
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High-Frequency Trading Firms: Market makers offer fast execution and low-latency environments, meeting the speed demands of high-frequency traders.
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Retail Investors: Although retail traders operate at smaller scales, they still benefit indirectly from market maker services.
02 Evolution of Market Makers
The development of crypto market makers has gone through several stages:
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Early Stage
When crypto markets first emerged, lack of liquidity was a major issue. Order books were sparse, bid-ask spreads wide, and transaction costs high. At this stage, individuals or small teams began offering market-making services by quoting prices and adding liquidity—early arbitrage activities fell into this category.
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Professionalization Stage
As the crypto market matured, professional market makers emerged. These entities, typically organized as specialized teams or companies, possessed greater capital, advanced technology, and deeper market expertise. Using sophisticated algorithms and trading systems, they provided higher-quality liquidity and tighter spreads.
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Institutional Participation Stage
With growing institutional interest in crypto, traditional financial institutions increasingly entered market-making activities. These players brought larger capital pools and stronger risk management capabilities, enabling them to supply significant liquidity and boost market volume and diversity.
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Increased Innovation and Competition
As competition intensified, market makers innovated further. Some adopted new models and strategies such as high-frequency trading and arbitrage to improve efficiency and profitability. Advances in technology—including machine learning and big data—also empowered market makers to optimize decision-making and risk controls.
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Liquidity Incentives
It's worth noting that Uniswap’s innovative AMM model is also a form of market making, allowing anyone to participate and earn rewards. This mechanism fueled rapid DeFi growth and ongoing innovation.
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Regulatory and Compliance Advancement
As the crypto market evolved, regulators increased oversight of crypto trading activities.
Overall, crypto market makers have continuously adapted to meet market needs, playing a pivotal role throughout the industry’s evolution by enhancing trading efficiency and liquidity.
03 How Market Makers Profit
Like traditional counterparts, crypto market makers primarily profit from bid-ask spreads. However, due to minimal regulation in crypto, the cost of malicious behavior is extremely low, and information flow and control largely reside at the top of the industry. Thus, market makers in crypto are often associated with being "whales" or "manipulators," making retail investors easy targets for exploitation.
1) Main revenue sources for market makers (legitimate ones):
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Bid-Ask Spread: Market makers simultaneously post buy and sell orders, profiting from the spread. They set lower bid prices and higher ask prices, capturing the difference—commonly known as “spread”—a primary source of income.
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Transaction Fees: While providing liquidity, market makers earn a portion of platform trading fees paid by users, incentivizing their participation.
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Arbitrage Trading: Market makers exploit price discrepancies across platforms or temporary market inefficiencies for profit, relying on ultra-fast execution and automated systems.
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Liquidity Rewards: Some platforms or protocols reward liquidity providers with incentives such as token distributions.
Thus, market maker revenues mainly come from two channels:
A. Serving Project Teams
B. Serving Trading Platforms
2) Relationship Between Market Makers and Project Teams
The relationship between projects and market makers is built around liquidity provision, especially crucial when new projects launch and require price stabilization. Market makers primarily fulfill three roles:
A. Providing Liquidity
B. Stabilizing Prices to Prevent Extreme Highs or Lows That Could Kill the Project
C. Market Cap Management to Enhance Project Visibility
Beyond liquidity, market makers assist projects in developing token pricing strategies and even help teams exit positions. Contracts between projects and market makers outline rights and obligations including reserve requirements, term lengths, and profit-sharing terms. Agreements vary depending on specific circumstances and must comply with legal frameworks. Market makers often choose prominent projects to boost brand exposure, while projects select reputable market makers to increase chances of success. Notably, many market makers are also investment firms, allowing them to better support their portfolio projects.
3) Relationship Between Market Makers and Trading Platforms
Since liquidity is the foundational infrastructure of any trading platform, exchanges offer market makers various benefits—such as fee discounts, leveraged funding, higher deposit/withdrawal limits, API access, and institutional account structures—to attract and support their operations.
Note that different platforms may impose varying requirements and partnership models. Some may mandate exclusive cooperation with designated market makers, requiring new projects to partner with them before listing.
Despite being atop the crypto food chain, market makers aren’t guaranteed profits and face both market and liquidity risks. The collapse of Luna triggered a chain reaction that devastated many market makers amid evaporating liquidity—a situation exacerbated by poor regulation, opacity, misuse of user funds, and reckless leverage. Alameda Research stands out as a prime example.
04 Major Market Makers
There are numerous market makers in the crypto space, but given the gap between crypto and traditional finance, partnerships between market makers and exchanges can easily lead to monopolies, with a few large players dominating market liquidity. Below are some currently notable ones (many projects don’t disclose their market makers, so only a partial list is shown):
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Jump Trading: A high-frequency trading giant founded in 1999. Markets Solana ecosystem, various DEXs, LUNA, MASK, LDO, etc.
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Wintermute Trading: A digital asset algorithmic trading firm established in 2017. Markets OP, BIUR, ARB, etc.
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DWF Labs: A global Web3 venture capital and market-making firm that suddenly rose to prominence in 2023. Markets CFX, MASK, ACH, FET, YGG; recently accused of market manipulation amid sharp price moves in YGG and DODO.
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Sigma Chain: A Swiss-registered crypto trading company; SEC litigation documents against Binance named CZ as its beneficial owner.
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Galaxy Digital: A cryptocurrency and blockchain asset management company founded in 2018.
B2C2: A crypto financial services company founded in 2015, active globally in crypto trading and market making. -
GSR: A Hong Kong-based crypto financial services firm founded in 2013.
Amber Group: A Hong Kong-headquartered global crypto fintech company founded in 2017.
Many projects keep their market-making arrangements and details confidential. Much of what’s known comes from fragmented disclosures in interviews with insiders, reflecting a general “quietly making money” approach. After all, revealing who exactly “drained” retail investors would harm reputations—better to remain hidden. For instance, details about WLD’s market-making setup were pieced together by Twitter users analyzing subtle clues.
05 Summary
Above covers the essentials of market makers. As key players in crypto markets, they play vital roles in maintaining liquidity, improving market efficiency, and reducing transaction costs. For investors, understanding market makers helps navigate the market more effectively.
Folks, what trading tactics do you know market makers use? Join the discussion below.
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