Liquidity is always an issue in investing and trading. This has long applied to the stock market but also to real estate, fine art, and more. Today there are digital token liquidity issues as well. This thought came to mind when we saw that a $30 million crypto bid for Hodlinaut was turned down due to poor liquidity. Hodlinaut is a crypto lender that is in financial trouble. OPNX is a digital asset exchange that wanted to bail them out and take them over. The takeover needs to satisfy creditors and the court. Because OPNX was going to use just its own tokens in the bailout and buyout, the deal was squashed.
What Is Crypto Token Liquidity?
Crypto tokens like Bitcoin and Ether are liquid. Many altcoins are not. Liquidity in this case refers to how easy it is to sell something. In the stock market, stocks like Amazon.com, Apple, or Microsoft sell in huge numbers. When you buy these stocks you can typically sell them right away at or very near the current market price. Penny stocks often do not sell in high volume and traders can lose their shirts trying to unload these investments in a falling market. The same concept applies to rare coins, real estate, fine art, and little-known crypto tokens!
Getting Stuck With Illiquid Crypto Tokens
When you buy crypto tokens with dollars, yen, or euros, you would like to be able to change back to dollars, yen, or euros at some point. You will accept the fact that crypto values fluctuate. However, if and when you find out that nobody wants to buy your tokens for a price anywhere near what you bought them for, that is illiquidity. There is always a temptation to buy the newest and shiniest crypto token with the hope that its value will soar in comparison to Bitcoin or Ether. The problem is that when you speculate like this you can just as easily end up with an investment that you cannot get rid of just a month after you bought it.
Why Don’t Creditors Trust OPNX Tokens?
Do you remember Three Arrows Capital? This was the crypto hedge fund in Singapore that liquidated last year with creditors claiming $3.5 billion in losses. It borrowed to support its trading losses as crypto winter sucked the life out of everyone who had bet on crypto always going up forever and ever. The ripple effects of this crypto business collapse were responsible for many other business failures as crypto winter threatened to be a crypto ice age. At the root of the fears of Hodlinaut creditors is that nobody will want or trust OPNX tokens issued by the same guys at the heart of the Three Arrows Capital collapse. Because no one will want these tokens, they are not liquid and will be difficult if not impossible to turn back into dollars, yen, or euros or into other tokens like Ether or Bitcoin.
Crypto Liquidity and Crypto Trading
Anyone who pays attention and trades cryptocurrencies can potentially profit from their efforts. However, liquidity is an issue here. There is a lot of hype in the crypto world. Many times what we see happening resembles the old pump and dump scheme. Somebody starts hyping an altcoin, the price goes up. They hype it some more and the price soars. That is when unwary traders buy in. It is also when those who were hyping the altcoin dump their tokens. What was, temporarily, a liquid token is not any more and traders watch the price plummet as they go to sell at greater losses.
Digital Token Liquidity Issues – SlideShare Version