Rising operational expenses, eroding public confidence, and regulatory challenges are resulting in significant financial setbacks for crypto market makers.
The crypto market-making industry, once a goldmine, is now navigating through turbulent times. Exponential operational costs and a market decline worth $2 trillion have exacerbated matters. Trust in market makers has further eroded due to legal actions against major players like Wintermute Trading Ltd.
Key liquidity providers, such as Auros and GSR Markets Ltd., are diversifying their operations across various exchanges, utilizing off-site digital asset storage, and even leveraging borrowed tokens as collateral. However, this increasing reliance on third-party services is leading to a profitability decline of 20 to 30%.
In a recent interview with Bloomberg, Le Shi, Auros’ Head of Trading, mentioned that the sector has been severely shaken by FTX’s downfall. The dramatic decline of the exchange has compelled companies to reexamine their risk mitigation strategies, thereby inflating their operational expenses.
Events like the legal scrutiny facing Wintermute Trading haven’t done the industry any favors. Accused of colluding with the now-insolvent crypto lending firm Celsius Digital and its former CEO Alex Mashinsky, Wintermute is now embroiled in a lawsuit initiated by a consortium of Celsius investors. Such events have further complicated the already challenging landscape, highlighting the precarious nature of investor trust.
While 2021 was a profitable year for the sector, with Wintermute reporting a trading volume of $1.5 trillion and a net profit of $582 million, the tides have significantly turned.
Market valuation has plunged to $1.1 trillion, prompting even industry stalwarts like Jane Street Group and Jump Crypto to pull back from digital assets amid lower trading volumes and an increasingly stringent regulatory environment.
The crypto community is gradually moving away from centralized exchanges to minimize risks. This trend is likely to accelerate, especially with circulating rumors about Binance facing liquidity issues.
Though centralized platforms still dominate spot token trading, there’s an evident move towards decentralized options such as Uniswap.