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Is every cryptocurrency a pump-and-dump scheme? Many people rightfully ask this question, because one common theme users notice nearly every time a token is listed on a new exchange is a massive rise to unsustainable prices, followed by a cliche collapse, which leaves participants holding the bag. 

Who is behind the curtain? The answer is market makers, the companies that crypto projects retain to manage the tokens (or liquidity) initially used for trading when they're listed on new exchanges.

Primary listings in crypto

The transition from private to public market trading via primary listings for digital assets is analogous to an initial public offering (IPO) in traditional securities markets, with one significant difference: the opening price for a digital asset market is often purposefully underpriced by digital asset issuers, leading to much higher first-day performance than in traditional markets.

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In traditional markets, passive investors mainly hold shares, while in digital asset markets, tokens are ideally held by active participants. Token market success 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 first-day pops in digital markets.

During a primary listing, a market maker — or MM — takes a large percentage of a token's circulating supply and puts it up for sale. This is done on an exchange’s pre-market order book, allowing MMs to place liquidity ahead of public trading. The goal is to ensure sufficient liquidity for efficient price discovery when the market opens.

However, some MMs undercapitalize order books to inflate short-term profits, harming the token community and project. This practice, known as “parasitic” market making, prioritizes MM profits over market health.

The different approaches for supplying liquidity for a primary listing via pre-market order construction are as follows.

Parasitic: A parasitic MM exploits premarket conditions by creating artificial scarcity and manipulating sentiment. They wait for retail bids to rise and then aggressively short the token, placing high sell orders to absorb demand, causing the token price to decline. This harmful strategy exploits initial demand, often causing irreversible market damage.Transitory: The parasitic MM manipulates the premarket order book, placing overwhelming sell orders to fill their positions and maximize fees or close OTC trades. This approach leads to a rapid market exit, removing potential price upside by heavily selling off the token.Symbiotic: In contrast, the MM uses its understanding of the premarket 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.

To categorize market makers by their approach, we tracked the price multiple performances of tokens within two critical periods: The initial two days post-listing (analyzed hourly) and the first two weeks (analyzed daily). This data, sourced from the project's primary trading platform or reliable aggregators, undergoes normalization for comparative analysis across different projects. Central to our analysis was the the Relative Change in Volatility (RCV), a methodology we previously introduced in a case study.

The formula for RCV measures volatility change with and without a token's all-time High (ATH) price. If the value is positive, it means the order book was undersupplied, indicating inadequate pre-market liquidity. A negative value indicates an oversupplied order book, which indicates aggressive market making — and an overpriced asset. A neutral value means that liquidity is correct for orderly price discovery. 

To assess primary listings and MM approaches, we applied the RCV methodology to 93 listings from April 2024 onward to Bybit, Kucoin, Binance, Coinbase, Kraken and OKX.

We 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 78.5% of launches were conducted in a manner that disrupted fair price discovery, detrimentally affecting 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. Conversely, Transitory launches showed a 34% decrease in volatility when including the ATH, indicating an oversaturated order book where initial supply was poorly managed, benefiting only the MM at the expense of community.

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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.

As the digital asset industry continues to grow in both legitimacy and size, it is imperative that market makers remediate the overwhelming mismanagement of primary listings. Asset issuers and exchanges should engage market makers — and leverage the RCV methodology — to analyze whether the market makers are appropriately structuring initial order books.

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.

Wesley Pryor is a guest author for Cointelegraph and the founder of Acheron Trading. He worked as a senior consultant for PwC before becoming a partner at Ænigma Capital and has served as an advisor to companies and projects including Hxro Games, CasperLabs and Geeq. He holds an undergraduate degree in business administration and a graduate degree in accounting from Florida Atlantic University.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.