Why is it assumed that borrowed currency will help you perform well? What happened behind the scenes after the project handed the currency to the market maker? This article will reveal the essence of algorithmic market making, analyzing how market makers use your tokens to trade for depth of trading, price stability, and market confidence.
First, the summary: Due to the current lack of liquidity in alternative currencies, the optimal solution for market makers in a call option position is to sell their project tokens as soon as it launches. Then you might wonder: if I sold the tokens initially, and assuming they rise again in the future, won't the market maker have to spend huge amounts to buy them back?
Reasons:
1. The market maker's strategy is delta neutrality, meaning not taking positions - what they want is to make a profit.
2. In fact, the call option limits the maximum price, which restricts the maximum exposure to risk in the stock market (even if the stock price rises 100 times, I can buy it at double the price).
3. The duration of this type of market contracts ranges from 12 to 24 months. According to the current market, most projects peak at their launch. How many of them can withstand for a year?
4. Even if it lasts for a year or two, the price of the currency has sharply increased, so the income generated from the currency price volatility is enough to cover the loss of 'selling' in advance.
