As many as 78% of new tokens perform poorly after listing. Is this due to market makers’ manipulation?

Does every cryptocurrency have a pump and dump scheme? Many people rightly ask this question because almost every time a coin is listed on a new exchange, users notice a common theme of a massive price increase to unsustainable levels followed by a cliché crash that leaves the participants to blame.

Who is behind this? The answer is market makers , companies retained by cryptocurrency projects to manage the initial flow of tokens (or liquidity) for trading when they are listed on new exchanges.

The transition of digital assets from private market trading to public market trading through initial public offerings is similar to the initial public offering (IPO) in traditional securities markets, but with one significant difference: the opening price of the digital asset market is usually deliberately undervalued by the digital asset issuer, resulting in a first-day performance that is much higher than that of traditional markets.

In traditional markets, passive investors mainly hold stocks, while in digital asset markets, tokens are best held by active participants. The success of the token market depends on the strength of its holders. Unlike IPOs where investment banks set the offering price, token prices in public financing rounds are usually below fair market price, resulting in higher first-day gains in digital markets.

During the initial listing, market makers (MMs) take a large portion of the circulating supply of a token and sell it. This is done on the exchange's pre-market order book, allowing market makers to place liquidity before it is publicly traded. The goal is to ensure that there is enough liquidity at the market opening to enable efficient price discovery.

However, some MMs inflate short-term profits by undercapitalizing their order books, harming token communities and projects. This practice is known as “parasitic” market making, which prioritizes MM profits over market health.

The different methods of providing liquidity to primary listings through pre-market order construction are as follows.

• Parasitic: Parasitic MMs take advantage of 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 fall. This harmful strategy exploits initial demand and often causes irreversible market damage.

• Transient: Parasitic MMs manhandle pre-market order books, placing large sell orders to fill positions and maximize fees or close OTC trades. This approach leads to a quick exit from the market, eliminating potential price upside by dumping tokens en masse.

• Symbiosis: In contrast, market makers use their understanding of the pre-market order book to strategically set open liquidity, build long-term value and ensure accurate price discovery. By providing liquidity to both parties, MMs facilitate an orderly price discovery process that reflects the true market value of the asset.

To categorize market makers by their methodology, we tracked the performance of tokens’ price multiples over 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 primary trading platform or reliable aggregators and is normalized to allow for comparative analysis across projects. At the core of our analysis is the relative change in volatility (RCV), a method we previously introduced in our case study.

The formula for Relative Change in Volatility (RCV). Source: Acheron Trading

RCV's formula measures the change in volatility with and without the token's all-time high (ATH) price. If the value is positive, the order book is undersupplied, indicating a lack of pre-market liquidity. A negative value indicates an oversupply of order books, which indicates aggressive market making and that the asset is overpriced. A neutral value means that liquidity is just right for orderly price discovery.

To evaluate the major listings and MM methods, we applied the RCV method to 93 listings since April 2024, including Bybit, Kucoin, Binance, Coinbase, Kraken, and OKX.

A breakdown of pre-IPO listing methods. Source: Acheron Trading

We found that 69.9% were classified as “parasitic,” 8.6% as “transient,” and only 21.5% as “symbiotic.” This means that 78.5% of launches were conducted in a way that promoted fair price discovery, which was detrimental to both end users and the projects themselves.

For Parasitic’s launch, including the ATH point resulted in a 420% increase in market volatility, indicating severe undersupply and price appreciation. Conversely, Transitory’s volatility dropped by 34% when the ATH was included, indicating an oversaturated order book and poor initial supply management, benefiting only MMs at the expense of the community.

Both parasitic and transient approaches severely impair price discovery and reduce the likelihood of sustained market participation. In contrast, the RCV of the symbiotic approach is approximately plus or minus 20%, providing a stable foundation for a fair and healthy price discovery process.

As the digital asset industry continues to grow in legitimacy and size, market makers must correct the problem of primary listing mismanagement. Asset issuers and exchanges should work with market makers and utilize the RCV method to analyze whether market makers have correctly constructed the initial order book.

Market makers have a bad image, and as the data shows, for good reason. It’s time to raise the bar, weed out parasitic operators, and hold market makers accountable for their critical role in enabling efficient price discovery.