Market Makers EXPOSED: The Hidden Engines Behind Crypto Liquidity

The Post That Sparked It All

So, the other day I saw this post that said, quote, "I'm convinced that 99% of the people on this app have exactly zero idea what a market maker is or does." And I was like, "Hm, you know what? I think he might be right here." Because every time there's a big move by some market maker, you instantly see people write manipulation or they're going to dump on us. But is that actually true though? You see, when I started digging into what a market maker actually does, the picture that came together was way different than what I initially expected. That's why in this blog, I'm going to break it all down for you because once you understand it, too, you'll start to see the crypto world in a completely different manner.

What Is a Market Maker?

All right. So, at the highest level, a market maker is just a liquidity provider. Just think of it like this. You land in Japan with a wallet full of US dollars. You go to the currency exchange counter and see that they're buying yen at one rate and selling it at another. That gap in the middle, that's the spread and that's how they make money. Now, market makers do something similar, but digitally, like they have automated bots posting buy and sell orders across dozens of exchanges every second of the day. So, it's not some shady guy in a hoodie smashing the buy or sell button to mess with us. No, it's actually 99.999% automated. And without these market makers, we wouldn't be able to trade smaller altcoins on centralized exchanges. Like, there'd be 20% slippage on a $1,000 order, which would be untradable.

How Market Makers Really Make Money

But here's the thing, earning spreads alone isn't why these firms are printing billions of dollars. No, they are doing so much more. For example, they do arbitrage when the price on Binance lags the price on Coinbase. They also cut special deals with token projects. Like many projects work with market makers when their tokens first launch because when TGE happens, usually the only people trading are airdrop farmers who want to dump, right? So projects rely on market makers to get that first wave of liquidity going, aka make the market.

The Two Market Maker Models

But here's where things get interesting because those token deals I mentioned, they're not all the same. In fact, there are two main ways that they are structured.

The Retainer Model

First is the retainer model, which is basically market making as a service. In this case, the project puts up a mix of tokens and cash, and the market maker uses that to generate liquidity. The market maker doesn't actually keep those tokens, though. It's still the projects. They're just paying the market maker a flat fee to manage it. Which means that if the trades are profitable, then those profits go back to the project. But if the market moves against them, then they have to bear those losses because it's their tokens on the line.

The Loan + Call Option Model

Now, the second model here is a lot spicier. It's called the loan plus call option model. Here, the project loans out like 1% of its supply while the market maker supplies the stable coins. In exchange for that, they get a call option to buy those tokens in the future at a fixed price. So, if that strike price is low, well, it's basically free money for them. Like, say a project rockets to a billion dollar valuation, but the market maker still has the right to buy 1% of it at the initial $50 million valuation. That means their 500K turns into 10 million overnight. Crazy, right? And that's not just hypothetical, by the way. Deals like that have definitely happened before.

How You Can Use Market Maker Tools

But anyhow, now that you know how marketing works, the next logical question is who's actually doing this? Well, that's a great question. But before we get there, do you want to know how you can harness the power of a market maker for yourself? Well, you can do so through trading bots such as the ones offered by three commas. You see, I mentioned that market making is almost exclusively done in an automated manner. And that's exactly what three commas can do as well. There are longtime channel partners, and they have literally the most customizable and powerful bots I've ever seen. They can put in trades for you based on your favorite Trading View signals. They can split up a chart into a grid and buy and sell automatically while the price goes sideways. I'm serious. If you can imagine a strategy, three commas bots can do it. And the best part is they are constantly adding new features such as their back testing tool where you can test any strategy versus historical data to see if it would have worked. But anyhow, my whole point is you definitely should check them out if you haven't already, as I think it's a great idea to at least use a slice of your portfolio with automated strategies or bots. So, if you're interested, just check them out using my link below and you can get a discount as well.

The Biggest Market Makers in Crypto

Anyhow, back to famous market makers. And in Trafic, you've got giants like Citadel and Jane Street. But in our world, the biggest players are different. For example, we've got Jump, a Chicago based high frequency shop that created a crypto arm in 2021 called Jump Crypto. Now, what's notable about them is that they were Terra Luna's secret backer. Like, they literally stepped in to prop up US when it started to wobble. In return, Docoin handed them 65 million Luna tokens at 40 cents a piece. So, as Luna ran over $100, that deal alone made them over a billion dollars. But when Terra collapsed, Jump lost billions. They got dragged in lawsuits. And today, they've mostly pulled back from market making in crypto altogether.

Other Major Players: Wintermute & DWF Labs

Anyhow, another major player here has got to be Winter mute, one of the most famous names in our industry. Recently, they moved $34 billion in a single month just between them and Binance. They're also known for holding massive memecoin bags. And even after losing $160 million in a hack in 2022, they didn't leave. Nope. They doubled down instead. And today, they've got their hands in CFI, DI, OTC, pretty much anything that has to do with liquidity. Winter Mute is there. But anyhow, another major player has got to be DWF Labs, the chameleon of the group. In just a couple years, they've invested in over 400 projects. So that means that sometimes they do VC stuff, sometimes they make markets, and other times they're generating hype for a token project. That's why depending on who you ask, they're either helping projects grow, or they're causing trouble.

Market Maker Manipulation & Tricks

Now, speaking of trouble, this is where the suspicion really comes in. Because while market makers say that they're just neutral liquidity providers, the way they move sometimes feels a lot like manipulation. For example, one thing that they sometimes do is called the liquidity grab. You see, market makers often know where retail hides their stop losses. So, they'll nudge the price just enough to trigger those liquidations and then they'll scoop up those coins at a discount and then send it right back. It's the classic stop hunt.

And beyond that, they also play a lot of deception games. Like sometimes they do spoofing where they stack fake buy or sell walls just to bait people in and then pull them at the very last second. Or they do the classic fake out where they create a breakout candle that looks super clean until it reverses and leaves everyone wrecked.

But it doesn't stop there. Timing is a part of their playbook, too. Like some firms quietly build positions during boring ranges and then unleash the real move once enough people are trapped. And then there's pure psychological plays like they create sudden wigs to spark panic or fake breakouts to induce FOMO. Sometimes they even like to play the news like they sell when there's good news or pump right before something bad comes out.

The Fine Line Between Liquidity and Manipulation

So, by now it's clear that market makers have some shady tricks in their bags. And these aren't just theoretical plays that we like to talk about. No, we've actually seen them happen in the real world. Like that move case, for example, where a market maker dumped $38 million worth of tokens shortly after launch, causing the price to crash 30% in a single day and 86% over time. But it's not just a few isolated blowups either. No, regulators have caught several of them doing this for years. Like the SEC literally charged firms like ZM Quant, Gotbit, and CLS Global with what they like to call manipulation as a service. Basically, they were running bots that could crank out a quadrillion trades and billions in fake volume every day. All to make projects look alive when they really weren't.

Final Thoughts: Heroes and Villains of the Market

So, as you can see, there's a lot of shenanigans going on in the world of market makers. But at the same time, not every weird move in the market is because of them. Sometimes it's a high frequency trading desk or an exchange's own trading arm or just a whale making moves. But because market makers are always in the background, they make the perfect scapegoat.

And that's actually what makes this whole thing so ironic because without them crypto would be chaos. Like we'd have tokens launching with no liquidity, prices swinging 30% on a single buy and half the market flatlining on day one. But on the other hand, with market makers, you always have that nagging feeling that someone's always one step ahead of you on your trades.

So in the end, market makers are both the heroes and the villains. Like long-term investors are mostly unaffected by legit market making, but short-term traders, they're the ones getting baited, stopped out, and liquidated. So, yeah, going back to that original post, I think it was spot-on because most people just don't know what a market maker is or does. But now that you know, do you have a different opinion about them or do you still think that they are shady and should get out of crypto once and for all? I'm really curious. Just let me know in the comments below.

Related: The Retail Investor Mega Trend

Oh, and by the way, if this blog opened your eyes at all, then the next one you should watch is my retail investor mega trend blog. That's where I explain why retail investors as a group are more powerful than ever before, but that individually we still struggle. If you're curious to find out why, then just watch that one right.