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Who are Crypto Market Makers and Market Takers?

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Understanding liquidity and trading dynamics is essential for those entering the cryptocurrency market. This knowledge helps young investors handle unpredictable crypto markets with minimal losses. At the heart of these dynamics lie two central roles: crypto market maker and taker. Their activities create a liquid, efficient, and dynamic trading environment essential for the healthy functioning of any financial market.

What is a market maker? What is a taker? And what are their roles in crypto trading? This article unveils these common questions for beginner investors.

Table of Contents

What is Market Liquidity?

In simple terms, market liquidity is the ease with which an asset can be quickly bought or sold without changing its price. High liquidity is synonymous with a stable market, where transactions can occur seamlessly and with minimal slippage. In contrast, low liquidity leads to a more volatile market, where trades can significantly impact the asset’s price. Crypto volatility, inherent in the digital assets market, highlights the importance of liquidity for maintaining market stability and investor confidence.

Who are Market Makers?

A market maker is an individual, a financial entity, a crypto market making company, or a high-frequency trader responsible for providing liquidity to the market by continuously buying and selling cryptocurrencies at publicly quoted prices. A crypto market maker operates on a market maker platform, using advanced algorithms to quote both buy and sell prices for particular crypto assets around the clock.

The role of market makers extends beyond simply facilitating trades. They also help narrow the bid-ask spread. That’s the difference between the highest price that buyers are ready to pay and the lowest price that sellers would accept. This narrowing reduces trading costs for all market participants and contributes to more efficient trading.

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Market makers take on the risk of holding cryptocurrencies in their inventory, exposing them to volatility. They manage this risk through various strategies, including hedging and adjusting their quoted prices based on market conditions.

Calculating profit and loss (PnL) is crucial for crypto market makers because it helps them evaluate their performance. How to calculate PnL? Here is a short instruction:

  • Realized PnL. It is the profit or loss made on completed transactions. It’s calculated by subtracting the buying price from the selling price for each trade. If a market maker buys 1 token at $10,000 and sells it at $10,200, the realized PnL for this trade is $200.
  • Unrealized PnL refers to the profit or loss on positions that have not yet been closed. It’s calculated based on the current market prices compared to the prices at which the assets were initially bought or sold. If a market maker holds 1 token that was purchased for $10,000, and the current market price is $10,500, the unrealized PnL is $500.

A market maker must consider the value of their holdings, which can fluctuate with market movements. These changes directly affect the PnL. If the market value of the inventory increases, it positively impacts the PnL, and vice versa.

Who are Market Takers?

Market takers in crypto are individuals or entities that execute trades based on the prices provided by market makers. When a market taker decides to buy or sell a cryptocurrency, they choose the best available price in the market, thus “taking” the liquidity out. This role is not less important in the trading ecosystem, as it ensures that transactions are executed, contributing to the market’s volume.

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The difference between maker vs taker is crucial in understanding trading fees on various platforms. Typically, market takers pay slightly higher fees than market makers. That’s the cost of taking liquidity out of the market. Low fees for makers stimulate market participants to provide liquidity rather than take it out.

What is Market Making in Crypto?

Market making involves using automated systems and algorithms by market-making companies to provide liquidity on exchanges. These systems constantly change buy and sell orders based on real-time market conditions to ensure they are providing competitive prices. The goal is to profit from the spread between buying and selling prices while minimizing the risk posed by market volatility.

The significance of market-making extends to stabilizing crypto prices. In markets where liquidity is low, a large order execution can move prices, creating an arbitrage opportunity but also increasing the risk for regular traders. Market makers reduce such risks by ensuring that there is always enough volume on both sides of the order book (to buy and to sell).

Market makers and market takers in crypto play complementary roles in the crypto ecosystem. Their interplay forms the backbone of the cryptocurrency trading landscape. By ensuring liquidity, minimizing price volatility, and facilitating efficient trade execution, they create a favorable environment for investors. As the crypto market continues to grow and more participants come in, the roles of makers and takers will undoubtedly adapt to new challenges and opportunities.

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Determining Rental Property Value: Guide for Landlords

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On paper running a real estate business seems straightforward. After all, all you have to do is ensure your expenses don’t exceed your rental income, right? Unfortunately, it’s rarely ever that simple. As a landlord, you have to strike a balance between making profits and keeping your rental rates low enough to attract tenants and to accurately do that you have to determine your rental property value. Here’s how:  

How to Determine Rental Property Value 

Property Type and Size

Evaluate your property’s features to get an accurate estimate of its worth on the market. A 3-bedroom single-family unit would be more expensive than a 2-bed apartment in a multi-unit complex, assuming they’re in the same neighborhood. Comparing the property cost with others can help owners define a more accurate figure on how much the rental investment is worth. 

 

This approach involves using the sales comparison method, where appraisers determine a rental’s value based on the price tag of similar properties. Most experts recommend using at least three properties to get a better picture, especially because finding an exact unit that matches your location, square feet, type, and amenities can be difficult. 

Property Condition

Consider how modern your property’s amenities and features are to calculate its value on the market. Another way real investors determine a rental’s value is by assessing its current condition and estimating how much it would cost to reconstruct it from scratch. The idea behind this assessment method, often referred to as the cost approach, is that investors the price of an existing property should match the cost of land, construction, and any depreciation. Ideally, property owners should not pay more for a property they can build for less. 

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This method is beneficial when landlords cannot compare their property type and size to recent sales, or in markets with well-defined construction costs, and it uses the formula:

Value of Property = Cost – Depreciation + Land Value

Rental Demand and Supply

Observe the local rental market closely to understand how current demand and supply affect your property’s worth. An accurate property valuation has to always consider the local market because location often plays a major role in determining the price of a rental. For instance, identical apartments in diverse neighborhoods can have different prices. On one hand, a three-bed and two-bath unit can cost up to $250,000 in a high-demand area with a low crime rate. However, an identical property in a less savory neighborhood could have a price tag of $180,000, which is why you should hire a knowledgeable rental property manager in Carroll County to guide you on the rental values in your area.

Seasonal Demand Fluctuations in Rental Properties

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High vs Off-Season

Plan your property purchases and sales around the calendar year to get the best results. Rental prices often follow a pattern that correlates with the seasons, allowing savvy investors to plan and take advantage of the cycle to maximize their profits. If you have some experience in real estate, most home searchers are most active in warmer weather, during the spring and summer seasons when house hunting is most convenient and coincides with the beginning of a new school year. Fall and winter months record less real estate activity, making properties cheaper as there are fewer potential renters. 

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Economic Factors

Use current trends to measure the potential value of your property. Aside from the seasonal fluctuations, rental prices can also vary from one year to the next based on the economy. For example, during the pandemic the economy slowed down, borrowing became expensive, and housing prices shot through the roof. As a result, predictions of cheaper housing in the off-season of the following years were still higher than projected estimates. Research market value to see options on how to increase property value so your rental stands out in any season. 

Tourist Destinations

Anticipate changes in rental property demand during tourist peak and off-season. This tip is especially useful for vacation rental owners who have to plan around the holidays when vacation spots are full. Coastal towns are more likely to experience an influx of guests when the weather is warmer and tourists are off to the beach. In contrast, rental properties near ski resorts see higher demand in winter when locals and visitors want to stay somewhere cozy. 

Conclusion 

Being able to accurately determine your rental property’s value can give you a competitive edge in the market. Knowing how much a property is worth allows investors to decide if a potential apartment is worth the trouble, and how much rental income they can earn from their investment. Comparing your property’s type and size to similar and recent sales is a great way to estimate its price, but you can also use its current condition and local rental trends. 

Consider how seasonal factors can affect rental property prices. The weather, economy, and tourist locations can easily influence occupancy rates, affecting your estimates in the long run. That’s why insightful investors also rely on the advice of experienced property managers to help them navigate rental property values. 

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