Balancing Crypto Markets: Perspective on Liquidity and Stability

Business

Crypto Market Insights

Crypto Market Making

6 minutes

Market makers underpin crypto liquidity and price stability. In 2024–2025, their resilience proved essential across ETF-driven surges, exchange outages and hacks.

Gravity Team Galactic rebalancing of crypto liquidity

Back

On centralized exchanges, market makers are the invisible hand ensuring continuous trading. These entities populate order books with buy and sell orders at various price levels, ensuring there’s always a counterparty available. This continuous quoting helps maintain active order books and narrow bid-ask spreads, making trading more efficient. For instance, a tight spread, sometimes just a few basis points, between the highest bid and lowest ask on Bitcoin is often a direct result of competitive liquidity provisioning. Narrow spreads reduce trading costs and attract higher volumes.

Equally important, market makers serve as shock absorbers during volatile conditions. During sharp price movements, whether upward surges or sudden drops, they inject liquidity, preventing extreme price dislocations. By placing limit orders and dynamically updating quotes, they help dampen wild swings that could otherwise trigger liquidations or deter participation. This stabilizing force ensures that even during high-volatility periods, large trades can be executed close to a fair market price with minimal slippage.

Key Contributions to Market Balance

Deepening Liquidity: By consistently populating the order book with buy and sell orders, market makers improve market depth. A liquid book encourages greater trading activity by providing confidence that orders can be filled at reasonable prices. Exchanges with robust liquidity also gain reputational strength.
Tightening Spreads: Competitive quoting between market participants reduces the spread between bid and ask prices, minimizing transaction costs. For top exchanges, BTC/USD spreads often remain under 0.10%, demonstrating the impact of well-functioning market making.
Facilitating Price Discovery: Continuous quoting enables real-time reflection of new information in asset prices. When news or economic data is released, market makers swiftly adjust quotes, allowing for efficient price discovery across venues.
Inventory Risk Management: To sustain liquidity, market makers often carry asset inventory, incurring exposure to price movements. When large orders push prices in one direction, inventory is balanced via hedging strategies such as futures, swaps or options. Effective risk management allows continuous quoting without overexposure to directional moves.
Low Latency Execution: With fragmented and fast-moving crypto markets, top market makers deploy ultra-low latency infrastructure near exchange engines. Their algorithms update quotes within milliseconds, capturing arbitrage opportunities and maintaining price consistency across exchanges.

Together, these mechanisms ensure that markets remain liquid and orderly. Traders can execute large orders with minimal price impact, and exchanges maintain competitive pricing due to constant quote provisioning.

Market Efficiency Through Arbitrage and Real-Time Reaction

Crypto operates as a global, interconnected market. Market makers play a vital role in arbitraging price discrepancies across exchanges; spot and derivatives alike. If Bitcoin trades at $30,100 on one venue and $30,000 on another, arbitrageurs buy low and sell high, quickly narrowing the price gap. This synchronization enforces global pricing efficiency.

These operations demand robust technology. Trading engines ingest live market data from numerous venues, executing cross-venue strategies when dislocations occur. Latency is crucial: milliseconds can determine profitability. This environment has evolved into an arms race for execution speed and smart algorithms.

The arbitrage process also underpins cohesive price discovery. When major events break, such as regulatory announcements, markets across geographies react in unison. This interconnectivity reduces fragmentation and maintains pricing integrity, even for less liquid tokens.

In parallel, inventory management is a persistent challenge. Crypto’s volatility necessitates delta-neutral strategies. When holding altcoin inventory due to one-sided order flow, exposure may be hedged using correlated assets or perpetual futures. The objective is not to speculate, but to maintain neutrality and support continuous quoting.

Recent data underscores that volatility is more manageable. Bitcoin’s climb past $60,000 in early 2024 came with roughly half the volatility of its 2021 surge, suggesting deeper liquidity and greater market maturity. Tighter spreads and thicker books now allow for more stable price discovery.

2024–2025 Liquidity Trends: Resurgence and Resilience

The collapse of FTX in 2022 challenged market structure deeply. By early 2023, risk reassessment led many market participants to reduce exposure. However, 2024 marked a strong comeback: the top 15 centralized exchanges recorded $18.83 trillion in spot trading volume, an increase of 134% over the previous year. Although still below 2021’s peak, this rebound demonstrated renewed confidence.

Binance retained its dominance, accounting for 39% of 2024’s spot volume (~$7.35 trillion). This figure tapered to 38% by April 2025 as liquidity became more distributed. No other exchange surpassed 10% individually, reflecting a healthier spread of volume across platforms. Such diversification reduces single-point failure risk and fosters a more resilient liquidity network.

Throughout 2024, spreads on top pairs such as BTC/USD and ETH/USDT remained tight. Even in high-volatility windows, spreads rarely widened beyond a few basis points. During calmer periods, such as October 2024, Bitcoin’s realized volatility dropped to around 22%, marking a multi-year low. Lower volatility enables quoting at larger size with reduced risk, encouraging more stable trading environments.

Stress Tests: Market Makers During Turbulent Events

ETF-Driven Volatility: In October 2023, a false tweet about SEC approval of a Bitcoin ETF triggered a rapid $2,000 price spike. Order books thinned and short positions were liquidated. Market makers adapted by recalibrating quotes and arbitraging across venues. When real optimism returned in early 2024, Bitcoin breached $63,000. During this surge, liquidity remained available, allowing large ETF inflows to be absorbed efficiently.
Exchange Outages: Technical faults also tested market robustness. In February 2024, Coinbase experienced a high-traffic outage during a price rally. Traders turned to alternative venues, widening spreads. However, order flow redistributed quickly, and once Coinbase was back online, price discrepancies were arbitraged away. In April 2025, a major AWS disruption hit Binance and several Asian exchanges, causing brief suspensions. Again, other venues absorbed the liquidity demand, preventing systemic dislocation.
Hacks and Recovery: Bybit faced a severe hack in early 2025, temporarily impacting liquidity. Within 30 days, BTC market depth on Bybit recovered to pre-hack levels (~$13 million average within 1% of mid-price). Bid-ask spreads, which had widened immediately post-incident, normalized quickly. Trading volume rebounded to $1.2B per hour during the event and stabilized thereafter. Such recoveries highlight how modern infrastructure and risk models help restore equilibrium quickly.

AMMs vs Order Books: Different Paths to Liquidity

While centralized order books rely on active market makers, decentralized exchanges (DEXs) use algorithmic AMMs. Platforms like Uniswap adjust pricing based on a constant product formula, with arbitrageurs bringing prices in line with broader markets.

DEX liquidity can be less responsive in volatile conditions. During major token launches, AMM pools often experience sharp price swings before rebalancing. In contrast, order books on CEXs tend to maintain tighter spreads and better execution for institutional-scale orders.

That said, AMMs now handle 10–15% of spot trading volume. Many traditional market makers contribute indirectly by supplying liquidity or arbitraging between CEXs and DEXs. The line between models is blurring, but for large-volume execution and precise pricing, centralized books remain essential.

Outlook for 2025 and Beyond

The role of market makers is evolving alongside the market. Regulatory developments in the U.S. and Asia, rising institutional participation, and infrastructure improvements all shape how liquidity is deployed.

While some firms scaled back U.S. exposure post-FTX, global market making activity has remained robust.

Upcoming events like potential spot ETF approvals, Ethereum upgrades and geopolitical news will all test market structure again. However, current trends suggest crypto’s liquidity environment is increasingly resilient. Interconnected venues, better tools and more competition have made balancing supply and demand more efficient.

Market makers play a pivotal role in enabling that balance. keeping prices stable, spreads tight and markets functioning under pressure. As crypto continues its march toward mainstream finance, these participants will remain fundamental to its ongoing evolution.