Are market makers using 78% of new crypto listings?
Is every cryptocurrency a pump and dump method? Many people rightly ask this question, because a common theme is that almost every time users notice a sharp increase in the number of tokens listed on a new exchange leads to an unsustainable price increase and then a clichéd collapse, in which participants take the bag.
Who is behind the curtain? The answer is market makers, who initially manage the tokens (or liquidity) used for trading when crypto projects are listed on new exchanges.
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The transition from private to public market trading for digital assets is essentially similar to an initial public offering (IPO) in traditional securities markets, with one major difference: the opening price for a digital asset market is often deliberately underpriced by digital asset issuers. It brings better first day performance than traditional markets.
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In traditional markets, passive investors mainly hold shares, while in digital asset markets, tokens are held by active participants. The success of the token market depends on the strength of the owners. Unlike IPOs, where investment banks set prices, token prices in public rounds are often lower than fair market value, leading to higher first-day pops in digital markets.
During a major listing, a market maker – or MM – takes a large percentage of the signal exchange supply and puts it up for sale. This is done on the exchange's pre-market order book, which allows MMOs to deposit amounts prior to public trading. The goal is to ensure sufficient liquidity for efficient price discovery when the market opens.
However, some MMOs seek to increase short-term profits, harming the token community and projects. This practice is called “dependent” market practice that prioritizes MM profits over market health.
Following are the various approaches to provide liquidity to a master listing through pre-market order building.
Parasitic: Parasitic MM exploits pre-market conditions by creating artificial scarcity and controlling sentiment. They wait for retail bids to rise and aggressively short the token, placing large sell orders to absorb demand, causing the token's price to drop. This harmful strategy exploits initial demand, often causing irreversible market damage. Transition: Parasitic MM adjusts the premarket order book, placing multiple sell orders to fill their positions and increase payouts or close OTC trades. This approach results in a rapid market exit, selling the token heavily and eliminating potential price upside. Discovery. By providing liquidity on both sides, MM facilitates a systematic price discovery process that reflects the true market value of the asset.
To categorize market makers by their approach, we tracked the price performance of several tokens in two critical periods: the first two days post listing (analyzed hourly) and the first two weeks (analyzed daily). Data obtained from the project's main trading platform or from trusted aggregators can be standardized for comparative analysis across projects. The focal point for our analysis is the “Relative Change in Volatility” (RCV) previously introduced in a case study.
The RCV formula measures the exchange rate change against a token's all-time high (ATH) price. If the value is positive, it means that the order book is not close enough, indicating insufficient pre-market liquidity. A negative value indicates an excessive order book, which indicates aggressive market behavior – and an overvalued asset. Neutral value means liquidity is just right for orderly price discovery.
We applied the RCV method to 93 listings from April 2024 to Bybit, Kucoin, Binance, Coinbase, Kraken and OKX to evaluate primary listings and MM approaches.
69.9% of primary strains were classified as “parasitic”, 8.6% as “transitional” and only 21.5% as “symbiotic”. This means that 78.5% of initiatives were conducted in a way that hindered the realization of fair value, negatively affecting both the end users and the projects themselves.
For parasitic launches, including the ATH point resulted in a 420% increase in market volatility, leading to oversupply and inflation leading to market extinction. In contrast, transitional startups show a 34% drop in volatility when they include ATH, indicating that startups have a poorly managed order book, with only MM benefiting from community spending.
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Parasitic and transitive approaches severely disrupt price discovery, reducing the likelihood of sustainable market participation. In contrast, symbiotic approaches yielded approximately plus-or-minus 20% RCV, providing a stable foundation for fair and sound price discovery processes.
As the digital asset industry continues to grow in legitimacy and size, it is imperative that marketers address the worst mismanagement of primary listings. Asset issuers and exchanges should engage market makers – and use the RCV methodology – to analyze whether market makers are properly structuring their initial order books.
Market makers have a scary image, and as the data suggests, for good reason. It is time to up the ante in enabling efficient price discovery, remove parasitic operators and hold market makers accountable. Our industry deserves it.
Wesley Pryor is a guest author for Cointelegraph and founder of Acheron Trading. Before becoming a partner at Enigma Capital, he worked as a senior consultant for PwC and served as an advisor to companies and projects including Hxro Games, CasperLabs and Geeq. He holds a bachelor's degree in business administration, and a degree in accounting from Florida Atlantic University.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
