Is every cryptocurrency a pump-and-dump scheme? This is a question that many people ask, and for good reason. It seems that almost every time a token is listed on a new exchange, it experiences a massive surge in price that is not sustainable, followed by a predictable collapse, leaving investors with losses.
So, who is really behind these price manipulations? The answer is market makers, the companies that crypto projects hire to handle the tokens when they are listed on new exchanges.
When digital assets transition from private to public market trading through primary listings, it is similar to an IPO in traditional securities markets, but with a significant difference. The opening price for a digital asset market is often deliberately set lower than its fair market value, leading to much higher initial performance than in traditional markets.
In traditional markets, shares are mainly held by passive investors, while in digital asset markets, tokens are ideally held by active participants. The success of a token in the market depends on the strength of its holders. Unlike IPOs, where investment banks set offer prices, token prices in public rounds are often lower than the fair market price, leading to higher initial gains in digital markets.
During a primary listing, a market maker takes a large percentage of a token’s circulating supply and puts it up for sale on an exchange’s pre-market order book, allowing them to place liquidity ahead of public trading to ensure efficient price discovery when the market opens.
However, some market makers undercapitalize order books to inflate short-term profits, which can harm the token community and project. This practice, known as “parasitic” market making, prioritizes market maker profits over market health.
There are different approaches for supplying liquidity for a primary listing via pre-market order construction, including parasitic, transitory, and symbiotic approaches.
To categorize market makers by their approach, the Relative Change in Volatility (RCV) methodology was applied to 93 listings from April 2024 onward to Bybit, Kucoin, Binance, Coinbase, Kraken and OKX.
The analysis found that 69.9% of primary listings were categorized as “Parasitic,” while 8.6% were “Transitory,” leaving only 21.5% with a “Symbiotic” approach. This meant that 78.5% of launches were conducted in a manner that disrupted fair price discovery, detrimentally affecting both end-users and the projects themselves.
Parasitic launches resulted in a 420% increase in market volatility, indicating severe undersupply and inflated prices that lead to market abandonment. Conversely, transitory launches showed a 34% decrease in volatility, benefiting only the market maker at the expense of the community.
Both parasitic and transitory approaches significantly impair price discovery, reducing the likelihood of sustained market engagement. In contrast, symbiotic approaches provided a stable foundation for fair and healthy price discovery processes.
As the digital asset industry continues to grow, it is imperative that market makers remediate the mismanagement of primary listings. Asset issuers and exchanges should engage market makers and leverage 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, weed out parasitic operators, and hold market makers accountable for their critical role in enabling efficient price discovery. Our industry deserves it.