Crypto market makers’ profits rapidly shrinking amid liquidation, legal woes

Growing operational costs, lack of trust, and legal scrutiny mark massive losses for crypto market makers. 

The once lucrative crypto market making sector is navigating choppy waters, with soaring operational costs and a $2 trillion market slump. The latest wrinkle is a loss of trust in market makers, fueled by a spate of legal accusations against key players like Wintermute Trading Ltd.

Major liquidity providers such as Auros and GSR Markets Ltd. are diversifying across exchanges, using off-platform storage for digital assets, and even deploying borrowed tokens as collateral. However, this dependency on third parties and intermediaries is contributing to a 20 to 30% drop in profitability. 

Crypto market makers are struggling with community trust

Le Shi, the head of trading at Auros, told Bloomberg in a recent interview that the whole sector has been rattled by the fall of FTX. The exchange’s massive fall from grace has forced firms to reevaluate their risk management strategies, which, in turn, has increased their operational costs. 

Other cases like the Wintermute Trading scrutiny haven’t helped the sector. The leading market maker was accused of colluding with the now-bankrupt crypto lender Celsius Digital and its former CEO Alex Mashinsky. Wintermute now finds itself at the center of a lawsuit filed by a group of Celsius investors. This event has added a layer of complexity to the industry’s current challenges, underscoring the fragility of investor trust.

Market makers were profitable in 2021

The sector was teeming with profits in 2021, most notably Wintermute, which boasted a trading volume of $1.5 trillion and a net profit of $582 million. However, the scenario has reversed dramatically.

Market value has plummeted to $1.1 trillion, and even stalwarts like Jane Street Group and Jump Crypto are retreating from digital assets due to reduced trading volumes and a stricter regulatory landscape.

The crypto community is increasingly shifting away from centralized exchange to mitigate risks. With recent rumours of Binance facing liquidity risks, this shift could become more rampant in the coming days.

Although the majority of spot token trading still takes place on centralized platforms, there’s a noticeable drift towards decentralized options like Uniswap.