Market Participants in Cryptocurrency Trading

In our previous lesson, we touched on key trading terms like market makers and market takers. These participants play a crucial role in how cryptocurrency markets function. In this lesson, we will take a closer look at their roles and how they contribute to market liquidity and price stability.
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When trading crypto assets, you automatically become a market participant, falling into one of two categories: market makers or market takers. Think of the crypto market as a supermarket: market makers are like suppliers restocking the shelves, while market takers are customers purchasing products. Both rely on each other to keep the market running efficiently.

Contents

• What is a Market Maker?
• What is a Market Taker?
• Market Taker Fees

What is a Market Maker?

Liquidity is a fundamental aspect of trading, whether it’s exchanging cryptocurrencies for other digital assets or converting them to fiat. A high-liquidity market ensures stability, allowing trades to be executed quickly and efficiently. On the other hand, low liquidity can lead to increased volatility, slippage, and difficulty in completing trades.
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A market maker, also referred to as a liquidity provider, plays a crucial role in ensuring that there are enough buy and sell orders available at all times. Market makers help maintain an active trading environment by placing limit orders, which determine the best prices at which they are willing to buy or sell assets. These traders influence price movements based on market conditions.

Market makers add liquidity by continuously filling the order book with buy and sell orders. The order book, maintained by an exchange, tracks all open orders. For example, if a market maker places:
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• a sell order above the highest buy order, or
• a buy order below the lowest sell order,

they create liquidity in the market. Since their orders are not executed immediately, they ensure that other traders can buy or sell assets without waiting for a new trade opportunity.

What is a Market Taker?

A market taker, also known as a liquidity taker, places orders that consume the available liquidity. Takers execute market orders, meaning they buy or sell assets immediately at the best available price.
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Since market takers remove liquidity, they rely on market makers to provide competitive pricing. Without market makers, takers would struggle to find suitable price points for their trades.
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Market takers include various types of participants, such as:
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• Retail traders and investors are individuals who  buy and sell assets for personal investment.
• Institutional traders are organizations that  manage large portfolios for clients or investment funds.
• Hedgers and speculators are traders who seek to profit from market trends or mitigate risk from price fluctuations.

One key difference between market makers and takers is that market takers usually pay higher trading fees, as they consume liquidity instead of adding to it.

Maker Taker Fees

Cryptocurrency exchanges charge trading fees when executing buy or sell orders. These fees vary depending on the platform and order size.
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• Market makers pay lower fees since they contribute liquidity to the exchange, making it easier for users to trade.
• Market takers pay higher fees because they remove liquidity from the market.

Now that we have covered the roles of market makers and takers, our next lesson will focus on market depth and volatility, which further influence trading strategies.

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