Liquidity is the oxygen & the lifeblood of any tradeable instrument.
All assets are generally classified as being one or the other:
Liquid or Illiquid.
Liquidity is a financial metric that constitutes the degree of ease & efficiency with which any instruments of value can be traded ( entered/exited ). Something that is highly liquid has a lot of constant demand from both sides of the market participants (Buy & Sell). Something that is illiquid has low-to-no demand on the Buy side of things.
To learn more about liquidity & why it matters read this article.
A fantastic way to depict the difference between the two extremes would be with the examples of Cash & Real Estate. Both of these assets are obviously highly valuable & highly desirable. However, there is a fundamental difference between how the two of them affect the personal financial portfolio of your life.
Cash is a highly liquid asset, we can trade it for the most amount of different things, at any given time, anywhere in the world. We can use cash in micro situations to get food & we can use cash in macro situations to buy houses. The immediacy of settlement that cash provides is instant, once the cash is handed over, the transaction is completed. I like to think of cash as a call option on everything (heard it first in an Impact Theory interview from Robert Breedlove)
On the other end of the Liquidity spectrum, we have Real Estate, High in it’s value but very illiquid. In order to enter/exit real estate there is a prolonged transactional process that must take place in order to move that value.
The transactional cost of moving large units of value such as real estate, creates a buffer from buyer/seller; its not uncommon to be expecting slippage of ~5–7% of the transaction. Fees from the beginning of your search, the local housing association, state property taxes, government sales taxes, filing fees, & so much more… So a $1,000,000 house will cost $1,070,000 to BUY & only be able to get back $930,000 for a SALE.
So is the nature of these asset traits, it is just important to understand how to utilize them properly. Where one might be superior to another it lacks in other ways.
$100,000 in Cash will be $100,000 in 10 years. Not to mention it’s buying power would deteriorate towards $50,000 assuming 7% inflation.
On the other hand, $1,000,000 Real Estate in 10 years will become more valuable, something in the order of $1,700,000 assuming 7% inflation.
There are so many different financial instruments & valuable assets outside of cash & real estate. From crypto to cars to fine art to bonds, NFTs & beyond, each individual asset will have its own unique economic profile & will fall somewhere on the spectrum of liquidity.
For over 99% of human existence, value has largely been based on tangible things. Rare stones (ruby, diamond, emeralds), Rare metals (silver, gold) Bonds & Cash (paper), land.
Today, as humanity continues treading towards technological singularity & society globalizes through the internet; the very concept of value is transforming into an intangible, digital medium.
Information/Data becomes the central point of society & the foundation of money.
This leads us to the next best invention since sliced bread;
Distributed Ledger Technology & Digital Assets.
Not long ago, some 13 years as of this writing, Cryptocurrency came into the public realm in the form of Bitcoin.
Bitcoin was designed for the purpose of serving as a truly decentralized digital money, a fungible asset. Meaning that it doesn’t matter which Bitcoin I have (#300 or #45662) they would possess the same face value. 1 BTC = 1 BTC. In any case, as Bitcoin aged into Digital Gold it laid the groundwork to empower thousands of motivated & intelligent collectives around the world to explore the bounds of economics via cryptocurrencies.
Massive digital economic ecosystems such as Ethereum, Binance, & Solana have risen. Billions of dollars flocked to conduct research & development in experimental economics including burning mechanisms, alternative consensus models, layer1 infrastructure, stablecoins, collateral models, lending & borrowing mechanisms, flash loans, the list is endlessly astounding.
It goes without saying that much of this work came at a real financial cost to the public/participants… some in the form of scams (bitconeeeect) & others in faulty design with good intents (LUNA/TERRA)… but through it all, the result is something incredible.
Cryptocurrency Proved Digital Liquidity.
Circa 2017, new digital asset technology comes to light.
Hello NFT’s.
(there was earlier tech with similar promises explored called “colored coins” sometime in 2011/2012 — but that development stayed tucked away in the niche chatrooms & never reached “public conscious”.)
While they have been grossly misappropriated by the mania of public greed, the true technical applications of Non-Fungible Tokens expanded the capabilities of digital organizations; digital “proofs-of-ownership”; At the highest level, Non-Fungible Tokens are digital ownership indicators. Their application replicates the properties of “uniqueness” within cyberspace for digital assets.
NFT’s & cryptocurrencies are both intended to serve as digital mediums for the storage, transference & account of value. However, as in the case of Cash & Real Estate, both are radically different in their liquidity profiles.
NFT’s are largely one-way BUY markets that are intrinsically designed to support the asset issuer/originator/creator. Whenever somebody is entering into an NFT they will incur large upfront transaction costs (something around ~10% + 2%marketplace + gas fees).
Likewise, on the other side of the trade is the sale/exit. NFT markets utilize a novel sale model, listing. Granted a sale will incur a further cost in the form of a (+ 2%marketplace + gas fees).
* This structure makes it nearly prohibitive to participate in high-frequency trading.
NFT’s are proving VALUE in DIGITAL ILLIQUIDITY
As the world’s power structures continue to deteriorate & decentralize, people will need somewhere to turn for economic safety & sovereignty. Cryptocurrency will continue to envelop the liquid world & swallow legacy finance. But we cannot overlook the fact that Illiquid assets represent the greater majority of the world’s wealth. In order to be able to transfer this value to sustain a global digital society, the full spectrum of financial tooling must be available. Something now being made possible through Non-Fungible Tokens.
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