Thread by @Melt_Dem

1/ re-visiting Howard Marks' @Oaktree comments on liquidity, very relevant to crypto, and especially thinly traded or centrally owned, alts:

the key criterion [for liquidity] isn't "can you sell it?" it's "can you sell it a price equal or close to the last price?"

2/ liquidity is ephemeral. it can come and go. the liquidity of an asset often depends on which way you want to go... and which way everyone else wants to go. if you want to sell when everyone wants to buy, you're likely to find your position is highly liquid.

3/ if you want to sell when everyone wants to sell, you may find your position is totally illiquid;
selling may take a long time
require accepting a big discount
or both.
it's not illiquid or liquid; it's entirely situational.

4/ but don't forget the power of the crowd. the crowd takes great pleasure in buying things when prices are rising, and they become highly motivated to sell when prices are falling, even though those may be the wrong things to do.

5/ as a crypto investment manager, the question may be:
can you sell x percent of the portfolio in a day, y percent in a month, or z percent in a year?
does any fund provide liquidity reporting like this? i haven't seen it yet but i kind of like it as a measure. however...

6/ selling z% per year assumes liquidity is constant. the real question is what effect market changes will have on that %. so really z is a range that is dependent on a series of assumptions about market conditions and the sentiment of the crowd.

7/ there's only one reason markets go up. more buyers than sellers. a clever investor will:
sell the things people are buying, and
buy the things people are selling

this is called a "contrarian" strategy. what might that look like in crypto?

8/ well, remember that liquidity is dependent on other investors who hold large amounts of an asset. investor homophily, or like-mindedness, can be a real killer. the more ownership is concentrated in the hands of a few large holders, the faster liquidity will disappear.

9/ when constructing a portfolio, be mindful of:
- the other people who hold it
- the mentality and investment strategy of those holders
- your entry price, and target exit price (moon isn't a price fyi)
- crypto market impacts on liquidity
- macro market impacts on liquidity

10/ lastly, create asset tiers ranging from highly liquid to totally illiquid and monitor positions in the context of liquidity. adjust as the market changes to adjust your risk / return profile to match your goals, cash needs, and the point you're at in the market cycle.

11/ i find Marks' writing very useful and pragmatic.
this letter on liquidity, from 2015: oaktreecapital.com/docs/default-s…
all of his letters: oaktreecapital.com/insights/howar…
one of my favorites is 2017's "There they go Again... Again": oaktreecapital.com/docs/default-s…
enjoy!

12/ and for those of you who say - well DUH thanks for pointing out the obvious Meltem - take a minute to assess your own portfolio in the context of liquidity risk. i got burned a few times chasing crypto returns without minding liquidity. i'm learning :D