There are many innovative crypto projects, yet most of them fizzle out as a result of having illiquid markets. Project developers invest most of their resources into writing code and marketing, yet often neglect keeping the order books healthy.
Some developers take the “high road” and don’t consider trading to be a worthy pursuit. Aside from working on getting their coins listed on all the exchanges, they tend to have a laissez-faire approach to the markets.
Leave the markets to manage themselves and eventually they may die. Most altcoins also die with their market. Time and time again we see the same scenario playing itself out.
Crypto Market Participants
- Pumpers: They accumulate large quantities of supply, pump the price to trigger a hype cycle, dump on everyone and move on to the next coin.
- Holders: They tend to be the ones buying the hype and are left as bagholders once the pumpers exit the markets.
- Miners: They secure the network but place continuous selling pressure on the markets because mining is a form of inflation.
- Developers: Most developers (especially ones who launch ICOs) also increase selling pressure on the markets. They tend to convert their coins into fiat to cover development costs.
- Merchants: Anyone who accepts a cryptocurrency for a product or service. They also tend to put selling pressure on the markets when converting into fiat.
- Traders: They tend to participate in any market that has decent price action.
- Market makers: They’re a type of trader who specialize in adding liquidity by placing orders on the books.
Then we have the exchanges that provide a platform for all this activity. Exchanges tend to cultivate relationships with the major players in the crypto space. Good exchanges will also find market makers to fill their order books. That said, most new altcoins need to find their own professional traders to make the markets.
The Coin Death Spiral
Once all the hype dies down, most altcoin markets become illiquid. Pumpers tend to squeeze as much money out of the markets as they can. Holders hoard their coins and keep them off the exchanges. Traders move on to find more interesting price action. Miners continue selling into an illiquid book. Merchants stop accepting the coin (if they ever did to begin with).
In the midst of all this, developers may continue to write code but usually as a side hobby from their day jobs that pay the bills.
The end result is that these projects die due to a lack of liquidity. Aside from the occasional pump, the only one’s left are the developers, a handful of miners and a few hardcore “hodlers” who clutch their coins to the grave.
Market Makers as the Solution
All of this can be avoided if project developers find professional market makers to keep the order books healthy. Stack both sides of the order book with an automated trading algorithm and you increase the chances of keeping your project alive.
Here are the benefits of market making:
- Pumpers won’t be able to manipulate the markets as easily.
- Reduce the amount of slippage for all participants.
- The project will have more miners because they’ll be able to sell coins to cover expenses. This will increase decentralization.
- Merchants will actually consider accepting your coin.
- Traders will be able to effectively execute orders. This leads to higher trading volume stats.
- Developers will be able to pay themselves for their work.
- Exchanges will keep the coin listed and new exchanges may add it.
- Holders will be happy to see their investment retain its value.
- Coins that have higher trading volume tend to attract new users into the space. These new users are important to offset the selling pressure from miners, developers and merchants.
Developers for new coins should factor this into their business strategy and older projects may want to consider reviving their markets. Fail to do this and chances are your project may end up in a dusty graveyard of worthless altcoins.