Are you planning to launch an IEO Project? Beware! Or you will get stuck in the liquidity trap. Sometimes you might get so engrossed in all the different core aspects of an IEOlike team, product, and marketing that you may forget about liquidity. Maintaining liquidity is a very important part of your project. Without this, your IEO project will come to a halt.
As we all know, IEO projects lack liquidity. Unlike capital markets, you have to use various tools to generate liquidity for your token in the market. It is created with the help of “Market Makers.” If you are new to the whole market making process, we can help you.
This post is for all those people who want to increase liquidity and traction for their token. In this post, we are going to show you how market making will help you gain traction for your token. Before we begin, let’s learn about market makers and their importance.
Market Makers
When your IEO ship is stuck, market makers act as the Knight in shining armor to save it from sinking. The market has two sides. We only look at one side of the market, which includes investors, traders, etc. They are called market takers. They are also known as liquidity takers.
You know how important they are for the success of your project. But, in order to take liquidity, there should be liquidity present. Here is where our heroes, market makers, come into the picture. They make-up the other side of the market. They are liquidity makers. For your IEO project to gain momentum, both sides should work in sync. We have always discussed the importance of market takers, but today we are going to discuss about the importance of market makers.
Market Making
It is a process where liquidity is provided to both the buyers and sellers by the trader. Let’s see what liquidity is and how it is created. Liquidity is where you can quickly buy and sell the tokens without affecting the price. Market makers make use of spread. They will quote a price to sellers as well as buyers of the token to maintain spread. The selling price in known as the Bid price and the buying price is known as to ask price—the difference between these two prices is known as the spread. When the spread is small or tight, liquidity increases. They earn a profit on the price variation.
Example
Bid price = $100; Middle price = $102.5 Ask price = $105. Spread = $5. The middle or actual price of the token is $1.2.5. Now the market makers will buy the token from the seller at bid price = $100. They will sell the same token to another investor for ask price = $105. Market makers will make a $5 profit. With this tight spread, they will increase the volume of token trading and maintain liquidity.
Liquidity Trap Explained
Smaller IEOs and tokens often face this issue. When your project lacks market makers, you may fall into this trap. You have listed with a good exchange, you have an excellent marketing strategy, your project is nicely planed, but without liquidity, investors will not buy your tokens. You want investors to buy your tokens, but investors need a liquid market.
- IEO issuers: You will face problems while listing your token on exchanges. They will need market makers assurance. If not, they will charge higher fees.
- Exchanges: They will face problems while listing your project due to a lack of market. They have to spend their money on time on due diligence.
- Investors: Without market makers, there will be wider spreads for your token. Investors are averse. In such an illiquid market, a small change can lead to higher losses like a pump and dump.
Market makers are the glue that holds all these three parties together. They provide the needed assurance and undertake risks to ensure market liquidity.
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