If you are planning to explore your passive income generating source, there couldn’t be a better option than to invest in the cryptocurrency exchange in India. The exchanges have been experiencing very high demand for Ether, Bitcoin, and other cryptocurrencies, and investors want to capitalize upon the favorable sentiments of the market yielding considerable returns. But before you buy cryptocurrencies from some of the top cryptocurrency exchanges in India, it is imperative to know how the market functions to keep the rates always stable, maker fees and taker fees, and liquidity stabilization.
How does the Trading Market Work via Market Makers?
The health or the competitiveness of the exchange depends upon how liquid it appears to be. For example, if there are certain tokens that are having high volatile prices, it would discourage investments. Thus, a market maker plays the role of always ensuring that the prices are stabilized and they earn a fraction from the spread. They do so by buying at the best prices and selling at the best offer, thus, creating a stable price for cryptocurrency tokens. But they never try to disrupt the demand and supply significantly to make super-normal profits. Some of the readers might ask why so? Well, they are appointed by the exchange to bring in the liquidity for which they pay little transaction fees for the sale and purchase of the assets. With that said, an exchange never runs out of liquidity since market makers are ready to buy and sell assets as and when required.
How Do the Market Makers Earn in An Exchange?
The market makers generally earn by fixing higher ask prices( selling) than bid prices (buying). In such a way, they do make a profit in the process. They act as a liquidity provider in the exchange by buying and selling cryptocurrencies like Ether, Bitcoin, and other ALT coins in bulk and stabilizing the exchange for its consistent growth. You can take, for example, a market maker buys 100 ETH at US$ 10, 000, and list them for sales as per the order-book price. The difference in the profit that the market maker is making is the difference between the maker and taker price for the sale or purchase from the order book. Since they buy & sell the cryptocurrency tokens in bulk, the profits are generally significant even though appearing marginal.
On top of that, they are even incentivized to pool in the liquidity to the exchange by being charged lesser maker fees. The difference between the maker and taker fee is the spread or profit for the exchange. Many franchises in India play the role of market makers where they buy a considerable amount of cryptocurrencies like ETH, DAI, and Bitcoin to ensure consistent liquidity at the exchange. In doing so, they are incentivized by getting charged lesser for maker fees. Similarly, if someone buys from the order-book, they have to pay a little extra than the maker, which is the taker-fees for healthy operations at the exchange. In case, if you have not understood the concept of the maker fees and taker fees, we have got that covered below.
What Are Maker and Taker fees for Cryptocurrency Exchange?
A maker-fee is the charge that the liquidity provider has to pay to the exchange to first buy the assets, in here the cryptocurrencies like ETH, and place it until it is picked up by another trader from the order book. This continuous process is called market making. The maker always places the sell order which should always be higher than the buy order. Similarly, the trader or buyer also places a price which is always lower than the lowest sell order price, thus stabilizing liquidity always. But the only catch here is that market makers have to lock in their capitals for a while until they are filled. They get the benefit of paying lesser maker fees or transaction fees in the process to incentivize them for bringing more liquidity to the exchange. PCEX Member cryptocurrency exchange explains the process in this way;
Maker Fee: 2$
Taker Fee: 3$
The price of 1 ETH is US$350
X & Y decides to trade at PCEX Member
Calculation of X, one of the franchises in India deciding to trade;
X has placed a buy order for 2 ETH at US$340. But as per the current market price, the order doesn’t execute instead goes to the order-book. X is the market maker here.
X has to pay $340*2=$680
Trading fees: 4$
X had to pay US$684 to complete the transaction
Y decides to sell ETH at US$340, the order executes and Y has to pay $686
The extra 2$ that X received is the benefits that X gets for being the market maker.
A taker fee is a charge that the trader has to pay for immediately buying an asset already recorded in the order book. In the above example, Y was the taker of the order whose ETH was quickly sold. The order book has features like limit orders or stop-limit orders to ensure price stability and better exchange function.
The practice of maker and taker fees has ensured that the exchange always fulfills the purpose of establishing consistent liquidity and faster sales and purchase of the assets or cryptocurrencies like ETH, BTC, and ALT coins. Where most exchanges charge hefty maker and taker fee, PCEX Member has done something significant by eliminating these to maintain high liquidity without the challenges like slippage or arbitrage, giving almost the same scenario as a DEX or decentralized exchange.