In cryptocurrency, exit liquidity refers to how easily a trader can sell their assets and cash out. It often carries a negative connotation, as it can be associated with schemes like “pump-and-dump,” where the value of an asset is artificially inflated only to drop once insiders sell. But what does this look like in practice, and how does it impact those buying cryptocurrency?
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“Exit liquidity” can refer to crypto buyers. Sometimes, traders or those who are usually big investors in the currency purposefully “trick” potential “exits” into buying crypto before selling big, providing liquidity for the seller. In turn, most buyers will have difficulty selling or earning a profit from the acquisition. In worst-case scenarios, they end up at a loss. With the increasing number of scams in the cryptocurrency world, it’s important for buyers not to fall into this category.
How it happens
Whether you are chronically online or not, chances are you’ve come across at least one influencer. Since crypto has blown up in the investment and financial world, different social media personalities have joined the hype. Other crypto users lure other traders into buying a coin or token using their platforms. They might post content about how well a coin or token is doing, regardless of whether it’s true or not. When this happens, people flock to the digital asset and buy into the crypto, which makes them vulnerable to becoming “exit liquidity.” The owner then gains from the transaction by selling a huge amount of the asset while the price is still high.
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Other online personalities leverage people’s fear of missing out, FOMO, to further influence traders. They would use phrases like “buy now before it skyrockets” or “don’t miss the next Bitcoin.” After the original owner cashes out, and with the hype dying down after the initial blow-up, traders are stuck with the digital asset they can either hold on to or sell for a much lower value. Being an exit liquidity happens not only in crypto but with other commodities as well.
Avoid being the exit liquidity
When a lot of people demand for a certain product, its price goes up. When someone sells a huge amount of that same product, the price plummets. This is how one becomes an exit liquidity. To avoid it, one must always be well-informed about cryptocurrency. Joining on the bandwagon just won’t cut it. After all, this involves money, so doing due diligence should be the bare minimum. It’s also important to know what kind of market the entity is in if they are truly knowledgeable about cryptocurrency and not just someone looking for a quick buck.
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Cryptocurrency regulations differ from region to region. In the US alone, laws and rules about cryptocurrency are vague and constantly changing. With its natural volatility, traders should be skilled and educated before diving in. An investor or trader must always be level-headed when making decisions. Emotions must be kept in check as scammers would often try to rile up excitement out of others. Market manipulation can be done by big investors, resulting in you becoming exit liquidity, so one must always be observant of the market.
Photo credit: The feature image is symbolic and has been done by Art Rachen.
