Let's imagine an extreme situation, the mansion of Lily Safra, widow of banker Edmond Safra, on the French Riviera. The 80 thousand square meter property is valued at approximately 500 million Euros, equivalent to R $ 2.9 billion . Although it has an indisputable value due to its privileged location, selling such a property is not so simple .
Now we understand in practice what liquidity is: the ease in disposing of an asset, without loss of value. Works of art and real estate of great value are extremely illiquid, that is, they take a long time to find a buyer. In the opposite direction, we have, for example, shares of the company Amazon or barrels of oil. Both are extremely liquid assets, traded around the clock, worldwide.
The fiat currency, for example, Real (R $) or Dollar (USD), are considered the most liquid instruments in existence , since their acceptance is mandatory due to the use of the law in their respective countries. Now we can only understand how to calculate such an index and what is the impact of this on the daily life of a cryptocurrency investor.
Relationship between liquidity and profitability
High liquidity is not a sign of positive profitability. The barrel of oil, for example, despite having a huge daily trading volume, depreciated 26% in 2020, measured in Reais R $ .
Oil loses even when compared to less liquid assets, for example, residential properties in São Paulo, which accumulated a 2.26% increase compared to the previous year, according to the FIPE Zap Index .
The precatory tokens offered on our MB Digital Assets platform certainly have less liquidity than savings, however, their expected return is up to 40% higher .
The definition of investment risk must be measured through volatility , a concept that is not necessarily correlated with liquidity. Assets with large daily fluctuation in prices are more volatile, so they can be interpreted as more risky.
The impact of a shortage on liquidity
In the traditional financial market, the loan of individuals and legal entities to banks is called CDB - Certificate of Bank Deposit. These securities, together with other fixed income investments intermediated by these institutions, such as LCI - Letras de Crédito Imobiliário and Debentures, have different grace periods, that is, liquidity.
Although in theory they are different, since nothing prevents someone from selling a security that remains “stuck” in the bank, in practice, for this investor, the grace period is equivalent to liquidity. The amount in question will remain without the right to convert into Reais, therefore, it remains without liquidity until its maturity.
A clearer and more practical example is in the case of a sharing of inventory assets. The exchange of the holder of this application does not make the value immediately redeemable, therefore, the investment remains illiquid.
Balance between liquidity and profitability
Even if an investor has selected the most profitable assets and within the appropriate risk level for each exposure, the portfolio's return may be severely impacted if it needs liquidity ahead of schedule .
In the extreme case, an investor who has allocated 50% of the capital in high-end properties and the rest in investment securities, CDBs with a 6-month grace period, will likely suffer big losses if he chooses to dispose of them immediately.
This marriage between the need for short-term capital and the availability of investments is called the Coverage Ratio. For this reason, it is important to always keep a percentage of cash or investments with liquidity within one business day .
This amount will vary according to the need for the usual monthly expenditure of each investor. Any recurring expense should be considered.
Liquidity in the capital market
When it comes to investments, the standard measure is the number of days required to make a redemption without loss of income . Some investment funds, in addition to the grace period, have a term in business days for redemption. The stock market itself usually works with two business days for settlement, that is, the financial settlement.
The Treasury Direct , for example, despite being extremely liquid, depends on the weekly auctions so that they can be carried out in buying and selling of securities. It is common for the Treasury to choose to postpone such auctions in situations of strong daily fluctuation in rates. In this situation, the investor is at risk of being illiquid for this period .
The liquidity of cryptocurrencies
It would be incorrect to say that cryptocurrencies have immediate liquidity, since it is possible to sell them for fiduciary values or stablecoins at any time.
Perhaps this is true when we talk about Bitcoin, Ethereum, Ripple, BCash and Litecoin, the five that have the highest daily trading volume . However, an investor in an ICO, the initial public cryptocurrency offering, may go months or years without being able to sell it. 70% of ICOs never get listed on relevant exchanges, according to research by ICOrating.
Even for the 30% of ICOs that get listed, their true liquidity is negligible. Unlike stock markets around the world, in the crypto market each exchange acts as an independent stock exchange. A BitWise report in 2019 showed that 95% of the reported cryptocurrency volume was fake.
Transparent volume in crypto
In this year 2020, we in the Bitcoin Market are very pleased to recognize the Blockchain Transparency Institute (BTI) as one of the 25 most trusted exchanges in the world . The study considered governance, in addition to the transparency and relevance of the volume , which was duly audited by the institute.
Several tools, among which we highlight Cryptowat.ch and Nomics, started to disclose “transparent volume” data, thus excluding data from exchanges that failed in their audit processes.
For this reason the Bitcoin Market is judicious in the selection of assets available for trading between customers. In addition to technical and security issues , we have carried out a thorough due diligence process that also considers liquidity , in order to offer a high level service to our users. Follow in this other article all the security measures adopted by the Bitcoin Market, the largest and most reliable crypto platform in Latin America .
