One striking formula reveals that up to 78% of new token listings since April 2024 have been poorly managed. Why do market makers appear indifferent to the repercussions?
Is Every Cryptocurrency a Pump-and-Dump Scheme?
This question lingers on the minds of many, as a familiar pattern emerges with almost every new token listing: a sudden, unsustainable price surge followed by a dramatic collapse, leaving investors at a loss.
Who is Pulling the Strings?
The culprits are market makers, the entities that crypto projects hire to manage the initial trading liquidity when tokens are listed on new exchanges.
Primary Listings in Crypto
Primary listings in the digital asset world are akin to initial public offerings (IPOs) in traditional markets, with a crucial difference: digital asset issuers often intentionally underprice the opening market price, resulting in significantly higher first-day performances than traditional markets.
In traditional markets, passive investors typically hold shares, while digital asset markets thrive on active participants. The success of a token market hinges on the strength of its holders. Unlike IPOs where investment banks set prices, token prices in public rounds are often below the fair market value, causing higher first-day pops in digital markets.
During a primary listing, a market maker (MM) places a large percentage of a token’s circulating supply for sale on an exchange’s pre-market order book. This ensures ample liquidity for efficient price discovery once public trading begins. However, some MMs deliberately undercapitalize order books to inflate short-term profits, a practice known as “parasitic” market making, which harms both the token community and the project.
The Different Approaches to Liquidity
- Parasitic: A parasitic MM exploits pre-market conditions by creating artificial scarcity and manipulating sentiment. They wait for retail bids to rise, then aggressively short the token, placing high sell orders to absorb demand, causing the token price to plummet. This harmful strategy exploits initial demand, often causing irreversible market damage.
- Transitory: This approach sees MMs manipulating the pre-market order book by placing overwhelming sell orders to fill their positions and maximize fees or close over-the-counter (OTC) trades. This leads to a rapid market exit, removing potential price upside by heavily selling off the token.
- Symbiotic: In contrast, a symbiotic MM uses their understanding of the pre-market order book to strategically set up opening liquidity, building long-term value and ensuring accurate price discovery. By providing liquidity on both sides, the MM facilitates an orderly price discovery process that reflects the asset’s true market value.
Evaluating Market Maker Approaches
To categorize market makers, we tracked the price performance of tokens during two critical periods: the initial two days post-listing (hourly analysis) and the first two weeks (daily analysis). The data, sourced from primary trading platforms or reliable aggregators, was normalized for comparative analysis across different projects. Central to our analysis was the Relative Change in Volatility (RCV), a methodology introduced in a previous case study.
The RCV formula measures volatility changes with and without a token’s all-time high (ATH) price. A positive value indicates an undersupplied order book and inadequate pre-market liquidity, while a negative value indicates an oversupplied order book and aggressive market making, leading to an overpriced asset. A neutral value suggests appropriate liquidity for orderly price discovery.
Applying the RCV methodology to 93 listings from April 2024 onward on Bybit, Kucoin, Binance, Coinbase, Kraken, and OKX, we found that 69.9% of primary listings were categorized as “Parasitic,” 8.6% as “Transitory,” and only 21.5% as “Symbiotic.” This means 78.5% of launches disrupted fair price discovery, negatively impacting both end-users and the projects themselves.
For parasitic launches, including the ATH point resulted in a 420% increase in market volatility, pointing to severe undersupply and inflated prices that lead to market abandonment. Transitory launches showed a 34% decrease in volatility when including the ATH, indicating an oversaturated order book that benefited only the MM at the community’s expense.
Both parasitic and transitory approaches significantly impair price discovery, reducing the likelihood of sustained market engagement. In contrast, symbiotic approaches yielded an RCV of approximately plus-or-minus 20%, providing a stable foundation for fair and healthy price discovery processes.
The Path Forward
As the digital asset industry continues to grow in both legitimacy and size, it is imperative that market makers address the overwhelming mismanagement of primary listings. Asset issuers and exchanges should engage market makers and utilize the RCV methodology to ensure that initial order books are structured appropriately.
Market makers have a terrible image, and as the data indicates, for good reason. It’s time to set the bar higher, eliminate parasitic operators, and hold market makers accountable for their crucial role in enabling efficient price discovery. Our industry deserves better.
