Written by Wesley Pryor, Founder of Acheron Trading
Compiled by: Chris, Techub News
A question on many people’s minds is, is every cryptocurrency a pump and dump scam? Almost every time a user sees a token listed on an exchange, they notice the same phenomenon happening, with the price rising sharply to an unsustainable height, then quickly crashing, leaving participants holding devalued tokens.
Who are the driving forces behind this phenomenon? The answer is market makers, the companies hired by crypto projects to manage the tokens (or liquidity) available for trading when they are listed on exchanges.
First listing of cryptocurrency
Digital assets move from private market trading to public market trading through an initial listing, which is similar to an initial public offering (IPO) in the traditional securities market, but there is another significant difference between the two. Digital asset issuers usually deliberately The price was set lower, which caused the digital asset market to perform much higher than the traditional market on the first day.
In traditional markets, passive investors mainly hold stocks, while in digital asset markets, tokens are ideally held by active participants. The success of the token market depends on the strength of its holders. Unlike IPOs, where the issue price is set by investment banks, token prices in public rounds are usually lower than the market fair price, resulting in higher first-day gains in digital markets.
During the initial listing, market makers will take a large portion of the token's circulating supply and sell it. This is done on the exchange's pre-market order book, allowing market makers to provide liquidity before public trading. The purpose of this is to ensure that there is sufficient liquidity when the market opens.
However, some market makers fill order books with poor liquidity for short-term profits, harming the community and the project itself. This practice is called "parasitic" market making, which prioritizes the profits of market makers over the health of the market.
The method of providing liquidity for the initial listing through pre-market order construction is as follows:
Parasitic: Parasitic market makers manipulate market sentiment by creating the appearance of "scarcity". They wait for retail investors to buy, then short the token, placing high sell orders to absorb retail buying demand, causing the token price to fall. This strategy often causes irreversible market damage.
Short-term: Parasitic market makers manipulate pre-market order books, placing large sell orders to fill their positions, maximize fees or complete OTC. This practice leads to a quick exit from the market, eliminating potential price gains through a large sell-off of tokens.
Symbiotic: In contrast, symbiotic market makers use their understanding of the pre-market order book to strategically set opening liquidity, establish long-term value and relatively controllable prices. By providing liquidity to both buyers and sellers, symbiotic market makers facilitate an orderly price discovery process that allows the true market value of an asset to be expressed.
To categorize the different market-making methods of market makers, we tracked the price performance of tokens in two key periods: the first two days after listing (hourly analysis) and the first two weeks (daily analysis). The data is sourced from the project's main trading platform or reliable aggregation platform and is normalized to allow for comparative analysis across different projects. The core of our analysis is the relative volatility change (RCV), a methodology we introduced previously in a case study.
The formula for Relative Volatility Change (RCV). Source: Acheron Trading
The RCV formula measures the change in volatility of a token with and without a record high price. A positive RCV value means that the order book is undersupplied, indicating insufficient pre-market liquidity. A negative value indicates an oversupply of order books, indicating that market making is too aggressive and asset prices are overvalued. A neutral value means that liquidity is moderate, which is conducive to orderly price discovery.
To evaluate the operating methods of market makers at the time of initial listing, we applied the RCV method to 93 new coin listings on the Bybit, KuCoin, Binance, Coinbase, Kraken, and OKX platforms since April 2024.
Classification of pre-market listing methods. Source: Acheron Trading
We found that 69.9% of initial listings were classified as “parasitic,” 8.6% as “short-term,” and only 21.5% adopted a “symbiotic” approach. This means that 78.5% of market-making methods disrupt fair price discovery, adversely affecting both users and the projects themselves.
For “parasitic” listings, market volatility increased by 420% including the ATH, indicating severe undersupply and inflated prices, leading to market abandonment. Conversely, “short-term” listings saw a 34% decrease in volatility when including the ATH, indicating an oversupply of order books, poor initial supply management, and only market makers benefiting at the expense of the community.
Both the “parasitic” and “short-term” approaches severely impact the price of the token, reducing the likelihood of sustained market participation. In contrast, the “symbiotic” approach has an RCV of approximately plus or minus 20%, providing a stable foundation for fair and healthy token prices.
As the cryptocurrency industry continues to grow in legitimacy and size, market makers must correct the mismanagement of initial listings. Asset issuers and exchanges should work with market makers and use RCV methods to analyze whether market makers are correctly constructing initial order books.
Data shows that market makers have a bad image. It is time to raise the bar, remove “parasitic” market makers, and let market makers assume the key role of facilitating price discovery. Our industry deserves higher standards.
