Blockchain is nothing if not a learning opportunity, particularly when it comes to all aspects of finance.
But blockchain is also supercharged; forcing new emphasis on traditional concepts, and none moreso than liquidity.
The definition of liquidity is simple.
It’s merely the ability to sell (or buy) an asset immediately without impacting the price.
In this way, the US dollar is generally considered the world’s most liquid asset. Everyone wants dollars and there’s enough of them floating around that you can sell millions of them without breaking into a sweat.
Similarly Apple or Telsa stock would be considered highly liquid equities.
Iranian government bonds or oil assets, however, are highly illiquid because no matter their nominal value or how good a deal you offered someone, no-one with assets in the US, or being controlled by companies with assets in the US, are going to trade with you because Iran is under US sanctions.
In this way, liquidity is a powerful market factor.
Assets may have a high face value but if they are illiquid, it’s irrelevant.
And this is how I now think about most NFTs and blockchain game assets.
Sure, anyone can chomp into a pre-sale spending thousands of dollars at a nominal 50% discount to the ‘retail value’.
But if post-sale, no-one else is interested in acquiring these assets at any price, the project clearly has great marketing but terrible community.
Price discovery gives confidence
This is one of the key reasons I rarely get involved in pre-sales these days. It’s too easy to drive FOMO.
Personally I’m happy to forego the drama of logging in at the right time with the right tokens in the right wallet to discover everything is already sold out.
For, if a project has legs, it will prove it as soon as those assets hit the marketplace. If I end up buying at a 100% premium, that’s great because the uptick demonstrates liquidity in action. People are buying.
Indeed, the best way of demonstrating to yourself that a project has liquidity is to buy a reasonably valued item and then put it immediately back on the market at half price.
The speed with which that asset is purchased will tell you a lot about the health of that project’s community.
Certainly there’s nothing worse than holding a bag of assets which is effectively worthless because no-one will buy at any price.
On that basis, I'll take a 100% mark up on a liquid project over a 50% discount on an illiquid project any day. That’s my definition of smart money.
Which brings me nicely onto the launch next week (7 June) of the alpha version of Blankos Block Party’s marketplace.
I’ve long been a cheerleader for - and small scale investor in - the project. Soon I’m going to find out whether or not my confidence has been justified!