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How to Become a Ripple Market Maker

A beginner's guide to Ripple market makers and how anybody can make money by learning how to become a Ripple market maker.

An Introduction to Ripple and Market Makers

Ripple is a peer to peer financial transaction protocol, with its own digital currency. To use Ripple you just need to set up a digital wallet, in much the same way that you would set up a wallet for a cryptocurrency like Bitcoin or Devcoins. One of the unique things about Ripple is that you can hold money in any currency within your wallet, including fiat currencies such as dollars or pounds sterling, as well as any digital currency. You can also convert your balance between any two currencies instantly, or by placing an offer using your wallet's built in trading interface. You can even make a payment to someone who is pricing their product or service in dollars (for example) even when you only have pounds or Devcoins or something else within your wallet - the Ripple system will automatically find the best exchange rate and make the conversion, so you can send any currency you want and they will receive the currency that they want.

The implementation of these features depends on two types of service provider - gateways and market makers. Gateways are what you use to get various different currencies into your Ripple wallet. Market makers are the people who make sure that you can always exchange as much as you want of any currency for any other currency and get a good deal.

One of the great things about this system is that anybody with a Ripple wallet can start using their idle balance to start acting as a market maker. All you need is a little bit of money in your Ripple wallet - nothing else is required to get started. There are market makers in the financial markets too. When you trade shares, exchange one currency for another when you are going on vacation, or send money to somebody overseas there will almost certainly be a market maker behind the scenes making this possible. They are the ones who are always willing to sell you an investment and buy it back close to market price, or sell you the foreign currency you need.

A market maker is the person who always stands ready to buy or sell a currency or asset at any time. If it wasn't for market makers, when you went to sell your Great British pounds for US dollars you may find that there is nobody who wants to sell their dollars for pounds, or that there are fewer available than you wanted to buy, or that the only offers left on the market are a long way away from what would be considered a fair market price.

Only banks and other large financial institutions can act as a market maker and enjoy the lucrative financial returns of doing so within the traditional financial markets. I love the fact that Ripple takes the power and profit away from these bankers and enables ordinary people to get their slice of the cake.

How You Can Make Money as a Ripple Market Maker

When buying or selling a currency or asset you will notice that there is a difference between the best price to buy at and the best price to sell at. This is called 'the spread', and is the profit taken by the market maker. If a market maker judges the fair price for dollars to pounds to be $1.5 to each £1, for example, they may then offer to buy pounds for $1.49 and sell them for $1.51, making $0.02 for every £1 traded.

Of course being successful as a market maker is a little bit more complicated than this, because the market price is constantly changing. This means that you might buy at $1.49, but by the time you want to sell you may find that each £1 you bought is now only worth £1.48 - meaning you have lost money. There are three ways that a market maker can escape from this risk (at least to some extent). The first is to judge which way the market is moving, so you can buy more pounds than you sell when their value is going up, and sell more than you buy when their price is falling. The second method is to place only small offers very close to the market price, and larger offers further away. A person wanting to trade a very large volume will often find that there is not enough available very close to the market price, so they will have to pay a slightly higher spread - the increased profits then compensate the market maker for their increased risk. The third way is to make the process of buying and selling as instant as possible by being involved in multiple marketplaces.

You can become a Ripple market maker simply by using the trading interface built into your wallet to place buy and sell offers. You can look at the current market offers and choose a spread that you are comfortable with. There are many different currency pairs available to trade, so it pays to find a market which currently has a larger spread, allowing you to post an offer which stands a good chance of being fulfilled but will still make you a fair profit. In order to increase your opportunities to make money you can also trade simultaneously on external Ripple gateways, Bitcoin exchanges, or other trading platforms which offer the same currency pair you are trading within Ripple. This will help you to reduce the time between buying and selling and hence your currency holding risk, and will also allow you to profit from arbitrage opportunities (taking advantage of the difference in price between the various gateways and exchanges and the Ripple system itself).

If you don't want to do all of this yourself then there is also an alternative available, although I cannot personally vouch for its performance. A currency called XMM is available to buy within Ripple, which effectively acts as shares in a market making fund. Each week the standing buy and sell price listed for XMM by its issuer on the Ripple platform is adjusted to reflect the fund's performance, meaning that if the fund is making a profit then the value of XMM against other currencies will rise proportionally. This is a new initiative run by an individual entrepreneur, so you invest in it at your own risk.

Categories: E-Currency | Ripple | How To


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