What Is Exit Liquidity & Why Learning About It Will Save You Thousands (2024)
Level: Beginner
If you’re new to crypto you’ve likely noticed there’s a lot of them. Thousands in fact and maybe, just maybe, you’ve also had the thought that some of these cryptocurrencies might be worth investing in besides Bitcoin. Maybe you should diversify your crypto portfolio? Or maybe your should learn what Exit Liquidity is first.
Contents
What Is Exit Liquidity?
Examples Of Exit Liquidity
What Is Exit Liquidity In Crypto?
You Are The Exit Liquidity
How To Avoid Becoming The Exit Liquidity
The Athena Assessment
FAQ
What Is Exit Liquidity?
When founders or early investors in a company wish to cash out of the company they do so via a Liquidity Event. This is where they will sell some or all of their shares of the company via a private sale, company acquisition, merger or Initial Public Offering (IPO). Exit Liquidity describes the group of people or company that purchases these shares.
It’s sensible for founders and early investors in a company to make sure they have an exit strategy before the commit their funds. This ensures that they have a plan for how they intend to get their investments back and it’s traditionally not been a bad thing to be the exit liquidity.
For example, maybe a big company like Intel or Google is the exit liquidity by buying a smaller start up company that has taken their fancy. This is great for the investors of the small company and great for Intel/Google because they get to crush a potential competitor while they’re still in their infancy.
However exit liquidity has taken on a much more negative meaning in the cryptocurrency world as it usually involves unsuspecting retail investors getting duped into buying worthless altcoins.
Examples Of Exit Liquidity
Liquidity refers to how easily and quickly you can buy or sell a certain asset without it incurring a substantial loss in value. For example there’s always someone who wants to buy/sell US dollars regardless of where you go and you could buy $10,000,000 USD without it changing the price. It’s a highly liquid asset.
If an asset has low liquidity, then it can take a long time to find a buyer at the price you’re asking, require you to decrease the price in order to sell it or in some cases, there might not be a buyer at all.
Typically it’s quite difficult to get exit liquidity. For example, imagine you invest $100,000 into a new company and own a 25% share. Things go exceptionally well and the company is now valued at $1,000,000! Now you want to sell your 25% stake which should be worth $250,000. The question then becomes, who do you sell this to? You generally only have three options:
Private Sale: You personally find someone who is willing to pay you the price you want for the shares of the company you own. This is exactly the same as when you sell any other asset, but as a business is quite a unique asset, it often has low liquidity and can take a long, long time to find a buyer or there might not even be a buyer at the price you want available
Acquisition / Buyout: You wait years for part or all of the company to be bought or acquired by another company. During this process you as an owner can potentially sell some or all of your shares to the buying company. If you’re a particularly important part of the business such as the founder, this might not be an option
IPO (Initial Public Offering): You develop the company over many years, take it “public” and list it on one of the many stock exchanges. Obviously all investors would have to agree to this to begin with, but even if they do, there is a huge amount of legal requirements and accounting that’s required, often costing a lot of money for everyone involved. After the IPO, you can then sell your shares on the public stock market hopefully at the price you want
What Is Exit Liquidity In Crypto?
As you can see, these options are exceedingly slow and hard with a lot of risk. It can take years, often a decade plus for a company to get big enough to be able to be listed on a stock exchange or get acquired and finding a private buyer that is willing to pay $250,000 for a random business won’t be quick either! Enter crypto.
Let’s go back to our example, but this time imagine you invest $100,000 in the new Shitcoin De Jour coin (SDJ). This cryptocurrency has no actual use, but you and the other investors use your money to hire some “core devs”, launch it and pay for some advertising.
You host AMA’s, Twitch streams, have a Discord channel, answer questions, have a flashy website and send out free SDJ coins to heaps of popular influences. SDJ coins are literally worthless. They don’t do anything. Maybe they’re a meme coin like Dogecoin which was literally created as a joke. But as an initial investor you own 100,000 of them and start selling them at $1 per SDJ.
Dogecoin was originally created as a joke in late 2013 by Billy Markus and Jackson Palmer
After some more advertising and other upgrades it gets listed on one of the many shitcoin exchanges like Coinbase, Binance or Kraken, joining the other 20,000+ dead shitcoins. Now anyone, any where in the world can trade fiat money for your completely worthless token! Add even more hype and now your Shitcoin De Jour coin is worth $2.50 and has a huge amount of liquidity! Time to sell!
As it’s listed on these massive, worldwide exchanges there is lots of liquidity (people willing to buy) and so in a few short years or even months you’ve made your profits with potentially millions of retail investors willing to be your exit liquidity.
You Are The Exit Liquidity
If you’ve ever read anything about scams or securities fraud you’ll likely realize that what we’ve just described is a pump and dump scheme that’s applied to the crypto world. It’s absolutely not new, but just like a lot of Bitcoin Scams, it doesn’t have to be new to work.
Hopefully now you can also fully appreciate why “crypto” is so appealing to investors and why it’s become so popular. You don’t have to wait 10-15 years to get your initial investment back plus you don’t even have to build a real, viable product!
These liquidity events can take on many different forms, but they all result in the same thing. Regular, retail investors being the exit liquidity of founders, VC’s and early investors. Over the past decade we’ve had names such as:
Initial Coin Offerings (ICOs)
Staking
Utility Tokens
Yield Farming
NFTs
Layer 2’s
All of these come with different narratives on why this new exit coin will be the next amazing thing that you can get mega rich off. Over time though, they’ve all gone to zero, but don’t take our word for it, here’s a chart showing the top 2,400+ performing tokens of all time all going to zero, while Bitcoin in black soars above. These are the top ones too! There’s been tens of thousands of worse performing ones than these!
If you’re not literally the people that created the coin, token or whatever name they come up with next, then you’re the exit liquidity. Don’t be the exit liquidity!
How To Avoid Becoming The Exit Liquidity
Focus on Bitcoin, not crypto.
That’s it. That’s literally all you have to do. Just focus only on Bitcoin and you will completely avoid this entire problem forever.
While some “experts” advise of ways you can avoid being the exit liquidity such as doing proper research, diversifying your portfolio, monitoring your investments or employing risk management strategies it’s kind of like “diversifying” your position when gambling on the pokies. You’re not doing anything financially responsible, so applying sound reasoning to it is useless.
It is possible that now or in the future there will be other legitimate use cases for different types of cryptocurrencies or NFTs. We’ve already covered how the second top crypto Ethereum may have some value, but it’s entirely different to Bitcoin.
>> Learn More: The Difference Between Bitcoin And Ethereum
For now though the entire crypto space is 99.9999% scams and gambling on ridiculous tokens that aren’t secure, aren’t decentralized and will also go to zero over a few years. Don’t get distracted. Bitcoin is an incredible technology that’s helping hundreds of millions all over the world to save, secure their wealth and build new things that have never been possible before. Focus only on Bitcoin.
The Athena Assessment
It’s common for beginners entering into the space to not fully understand the nuances of Bitcoin and crypto. While Bitcoin is a cryptocurrency, there is a push to try and lift it above and separate it from the broader “crypto” community precisely for the reasons outlined above.
We’ve written about the Difference Between Bitcoin And Cryptocurrency before and actively encourage all people to not only focus on Bitcoin, but to not engage in gambling or short term trading as this historically ends very poorly for most people and costs them thousands of dollars.
>> Learn More: Bitcoin, Not Crypto
These crypto exit liquidity schemes are usually the most active during bull markets, however there’s also been many going on for multiple years now. These prey on new investors that are attracted to crypto with the promise of “huge returns” and have little investing experience or knowledge.
They get combined with old, but effective, high pressure sales tactics like FOMO, timed offers, special offers, bait and switch offers and more. We expect the next bull market will invent yet another “amazing new offer” that will dupe people once again.
Now that you’ve read this article though, you should know exactly what to do and repeat these words back to yourself over and over and over again if you ever find yourself thinking about shitcoins. Say it with us:
Focus on Bitcoin, not crypto.
FAQ
What Is Exit Liquidity Crypto?
While exit liquidity has a legacy financial meaning, in crypto it usually refers to the poor retail investors that are tricked into buying worthless coins or tokens from the founders or early investors as they exit their positions into cash. This leaves the new investors with worthless assets
Is Liquidity Good In Crypto?
Liquidity is an important part of any asset and refers to how easily and quickly you can buy or sell the asset without it incurring a substantial loss in value. In crypto, just like with other traditional assets, more liquidity is better
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Timely and great info. If there are no buyers there is zero liquidity and no exit. Learned that lesson many years ago.
A saying from decades ago- in a bull market even the turkeys fly. The crypto world as you’ve so ably described