Crypto Market-Making Profit Margins Take a Hit, Down 30% Amid Industry Changes
The once-lucrative business of market-making in crypto, facilitating trades and profiting from the spread between buying and selling prices, has faced headwinds recently.
One major factor contributing to this decline is the heightened caution among investors following the crypto market's downturn last year, which wiped out approximately $2 trillion in value, Bloomberg reported on Tuesday.
The bankruptcy of exchanges like FTX has left a significant amount of digital assets stranded on collapsed platforms, making market-makers wary of potential future turmoil.
To mitigate these risks, the firms have adopted several strategies that, while reducing exposure, have also eroded profit margins, the Bloomberg report said.
One approach is diversifying activity across multiple cryptocurrency exchanges to avoid concentration risk.
Additionally, market-makers are increasingly storing digital assets off trading venues and using them as collateral to borrow tokens for deployment on crypto platforms.
This collateral is typically held with custodians or prime brokers, ensuring that only the borrowed tokens are exposed if an exchange were to fail.
Not surprisingly, risk-mitigation measures come at a cost.
According to Bloomberg, using intermediaries to manage collateral reduces profitability by 20% to 30% compared to leveraging coins directly with a trading platform.
Despite the decline in margins, market participants are recognizing the necessity of these strategies, acknowledging that higher costs are now an inherent part of doing business in the crypto market.
“The FTX debacle was a wake-up call for the industry,” Le Shi, head of trading at crypto-focused market-maker Auros told Bloomberg.
Shi admitted that risks associated with leaving digital
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