From the founders desk July
Making the most of Market making on Sparkdex
Most ‘traders’ that are vocal in crypto channels often don’t appear to be professionals who can see the opportunities in front of them and instead stick to hoping the price goes higher than what they bought at. While that form of speculation is what runs a lot of crypto markets, knowing how to make money when markets go up or down with as little risk as possible is the real key to bringing in stable profits, today we will look at some of these strategies and how they apply to Sparkdex.
What is Market Making
Firstly, for those unfamiliar with the term market making, it refers to a trading entity (individual or company) who enters buy and sell orders in an orderbook for execution. Often this means entering orders above and below the current market price hoping to have their orders executed when someone either buys or sells enough to hit their order.
For example: if the current market price of an asset is 1, then a market maker may look to buy that asset at 0.9 and sell at 1.1, thereby whether the price goes up or down their order may get taken. If the order gets taken at 1.1, then the market maker will then take the money they made from selling the asset at 1.1 and look to buy it back at say 0.95 again - now they have the order at 0.9 and 0.95 on the orderbook. If someone then sells the asset back to them at 0.95 they take the asset and re-list at 1.1 again and so on.
The point being that they sell at a high price and look to buy back the asset at a low price, pocketing the difference. If they sell at 1.1 and buy at 0.9 then they made 0.2 profit on those transactions. Over time market makers place many such orders on both sides of the price, looking to capture any volatility in the market moving up or down.
If the market fluctuates (like Bitcoin has recently around USD10,000) then market makers generate good profits by buying below 10k and selling above 10k as it oscillates. Over time, Market Makers build up larger and larger balances on both sides which they can then liquidate for profit or reinvest as more market liquidity.
This can be seen on an article I wrote about market making with Dexbot a while ago (more on that later) whereby over time you can generate larger balances in both of the assets you’re trading.
Market Making on Sparkdex
Sparkdex is a gateway for the Bitshares decentralised exchange with all users having custody of their own keys and funds at all times. As far as trading goes, the fundamentals are just like any other centralised exchange - there are bids and asks, orderbooks, various keypairs, stablecoins etc.
There are a few good crypto trading strategies to look at when looking to make money on Sparkdex. Below we will touch on a few:
Market Making on the ZEPH/BTS market
ZEPH is Bitsparks core token with a percentage of commissions on all Bitspark products going towards buybacks of ZEPH on this market, of which this month will mark the 9th month of buybacks. This also presents opportunities for ZEPH/BTS market makers.
ZEPH/BTS generally follows the BTS price and has traded within a range of 0.07-0.095 for many months now.
Astute market makers would be setting buy orders at the low end of this range (0.07) and above, and sell orders at the high end of the range (0.095) and below. Couple this with the effect of buybacks that can chew through sell orders on the book there is always a guaranteed market action monthly.
Relative to the USD, ZEPH has held its price well versus the falling BTS price and over the last month. In the lower volume candles the price has been moving up from 0.074 to now 0.085 and looks set to continue this trend.
Market Making on stablecoin markets: Sparkdex.HKD / Sparkdex.BTC
The Hong Kong Dollar in reality is pegged to the USD at 7.85. That means that a HKD is ultimately the same as a USD and in the real world traders trade it as a proxy USD without all the encumbrances around dealing with real USD regulatory wise.
Therefore, any deviation above or below the 7.85 mark presents and opportunity. This is also true when you consider that due to HKD being a proxy USD, the HKD/BTC market should follow the USD/BTC price. What often happens however is that, because the price of USD/BTC can vary drastically in a short period of time, the HKD/BTC price doesn’t react as fast. Therefore you can often get a $200-300 premium for selling BTC or $200-300 discount when buying BTC on this market.
Placing orders either side of the equivalent USD/BTC price for market makers is one strategy. These will move as the BTC price moves. Another option is scalping orders when the price is optimal, we see this happening almost daily.
The BTS price arbitrage
The Bitshares (BTS) price on the DEX, particularly the BTS/BitUSD market is almost always lower than on centralised exchanges like Binance (BTS/BTC and then BTC/USDT). Purchasing BTS at the DEX and selling it on Binance is one way to make the difference between prices, often 1-3% per trade.
Once you sell BTS for BTC on Binance however, you are now in BTC and must convert it to a stable USD reference (like the bitUSD you had originally) or to USDT. The good news is there is also sometimes pricing opportunities between stablecoins on Binance whereby USDT/USDC/TUSD and others can trade at a slight premium to each other (0.1%).
In such an arbitrage scenario pricing risk is very small.
Automation of Market Making
A lot of these Market Making strategies can be automated, we would recommend everyone check out https://www.dexbot.info/ which is an open source market making bot for the Bitshares DEX.
We at Bitspark are running DEXbot as are many others on many of the Sparkdex markets. One of the interesting upcoming features to DEXbot arriving very soon is the cross-exchange arbitrage functionality whereby market making strategies like the above BTS price arbitrage could be possible across CEX’s versus the DEX.
Because cryptocurrencies are a 24/7 market there are always opportunities even when you are sleeping so automation is key to being able to exploit as many of these opportunities as possible. By running DEXbot as soon as one of your orders are taken on one side of the orderbook, a corresponding order is often placed on the opposite side so if the price does move back the other way in the range, it can get taken.
Sparkdex offers an excellent array of opportunities for market makers across many different pairs and this is only a few of them. As always do let us know what your favourite trading and marketing making strategies are if you have any questions feel free to reach out.
Learn more about capturing unique crypto trading opportunities with our DEX Masterclass series.