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Thinking about strategies for illiquid markets
Blackstone is a company known for making bold moves in illiquid markets. They were quick to sell a significant portion of its real estate portfolio before the 2008 crisis, bought and sold a gigantic portfolio on the brink of crisis, and started buying houses after the prices were reaching bottom.
Illiquid markets can give a real advantage to players that are:
Well connected, so they can both get signals for market changes and buy/sell assets quicker because they are well connected to counterparties
Large balance sheets (or committed investor funds) and not much leverage, so they can weather any period where market dries up and wait for things to improve
Liquidity in crypto goes two ways. From the individual investor standpoint, BTC and ETH are large enough to accommodate most. But when you start going to the long tail, size can be an issue. That’s why the small investor has somehow an advantage here, at least from the liquidity standpoint.
NFTs are the exception. The size of the market, the nonfungibility of the assets, the small and generally indivisible supply makes it much less liquid than the general crypto market.
Even for NFTs where markets are hot right now, like CryptoPunks and Hashmasks, it can take days to weeks for you to get a bid at the fair value for your item.
Hashmasks are an interesting case study. It was a seller’s market when all the items were only differentiated by serial # and name. It became a better market for buyers —at least for the more common types — when the reveal happened.
Sizing: if you’re on the low single-digit size, it’s easy to just hold to a position until the market adjusts to your views. This can be tricky if you start off with a small position but it multiplies before you can get to liquidate it.
Testing the market: sometimes you have to test the market to see how liquid, especially when you have different market dynamics happening at each stage. With Hashmasks, where there were different sale periods and a reveal, you could have done both a sizing adjustment and a market test. To always be in the market will give you a feel of how it’s going, in the absence of orderbook-style data. This is very valuable and it’s something I definitely should have done more.
Consider liquid alternatives if you just want price exposure, like $PUNK