You will be able to assess how quickly any alternative can be turned into cash and what that costs.
In 2022, plenty of people in Singapore learned that "I can always sell" is a guess about the future. Customers of the lending platforms in lesson 5.3, Celsius, Hodlnaut and Zipmex: yield from lending your coins, had balances on screen they could not move. Elsewhere, people holding small tokens found that the price on the screen vanished as soon as they tried to sell any size. Neither group had thought of liquidity as a risk until it was gone. This lesson makes it something you check before you buy.
Lesson 5.3 of How money works, Liquidity: how fast you can get the cash without losing value, defined liquidity with two parts: how fast you can turn something into cash, and how much value you lose doing it. For alternatives, both parts are usually worse than for the things you already hold, and they get worse at the same time.
At one end, shares and ETFs listed on a major exchange can usually be sold within seconds during market hours, at a price very close to the last trade. At the other end, a painting may take months to sell. You might need to consign it to an auction, wait for the next suitable sale, and accept whatever the room bids. If you need the money in a week, the only route may be a dealer, who will offer well below what you hoped for, because the dealer is now taking the risk and the wait.
So for any alternative, ask two questions. How long would it take to sell at a fair price? And how much would I have to accept to sell this week?
A market is thin when there are few buyers and sellers, so even modest selling moves the price. Small crypto tokens, niche collectibles and shares in fractional ownership platforms are often thin.
In calm times, thinness costs you a little: a wider gap between buy and sell prices, or a few weeks' wait. In a rush, it costs a great deal. When many holders want out at once, buyers step back, and the few who remain only buy at much lower prices. The people trying to sell then cut their asking prices further, which pushes the price down for everyone. That is why prices of thinly traded assets can fall faster and further in a panic than prices of large, busy markets.
The trap is that the times you are most likely to need your money, such as a job loss or a downturn, are the times when markets are falling and many others want to sell too. An asset that is easy to sell on a quiet Tuesday may be hard to sell in exactly the week you need it.
Some alternatives have rules that stop you selling, regardless of price.
A lock-up stops you selling for a set period. Token allocations to insiders often have one, as lesson 2.3, Tokens, DeFi and the questions to ask any of them, explained, and some investment products lock up investors' money too.
A notice period means you must ask for your money in advance and wait. Some platforms process withdrawal requests only on certain dates.
Withdrawal limits cap how much you can take out in a day, a week or a month, or allow the provider to suspend withdrawals in certain conditions. Read those clauses closely, because they decide what happens in a crisis. The lending platforms of 2022 relied on exactly this kind of right when they froze customers' accounts.
And some assets simply have no exit until they mature. A P2P loan from lesson 7.1, P2P lending: you are the bank, and you carry the defaults, usually runs to the end of its term.
The rule that follows is plain. Money you might need in the next few years belongs in places you can reach quickly and in full. Only money you will not need for years should go into assets that might take months to sell, or that could be frozen.
Here is how Kumar applied it to his own list, ranked from fastest to slowest. His figures are made up and his discounts are rough guesses, which is fine for this exercise. His savings account is same day, with no discount. A world equity ETF sells in seconds during market hours, with a very small discount in normal times. His gold savings account sells back to the bank in its app the same day, at the bank's buy price. A P2P loan, if he made one, would be held to maturity, perhaps a year. And a watch, if he bought one, might take a few weeks to sell to a private buyer, or sell to a dealer in a day at perhaps 20% below its market value.
Seeing it laid out, Kumar noticed that the two assets he was most excited about were also the two slowest, and that the P2P loan would have none of the flexibility he had assumed. That did not rule them out. It told him how much of his money they could sensibly hold.
Your own list will look different from Kumar's. Build it from the assets you actually hold or are weighing up, and be honest about the discounts, since a guess you would be embarrassed by is usually closer to the truth than a hopeful one.
Rank five assets you hold or are considering by how fast you could sell them, with the likely discount for each.
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