Exit Liquidity In Crypto Explained
Exit liquidity in the crypto space refers to retail investors purchasing worthless tokens. This makes it simple for early investors to sell their coins to generate profits successfully.
However, this term carries an adverse inference because it is associated with dishonest practices like deceptive advertising, insider trading, and price-fixing schemes. Price drops can be considerable when a major player decides to sell off a large stash of a particular crypto asset, especially when such an asset has little trading volume.
As a result, smaller investors unintentionally give these big holders the means to liquidate their holdings by holding onto them far longer than necessary. In addition, some scenarios can force holders to become victims of exit liquidity to whales. Below are some of them:
Initial Coin Offerings (ICOs)
This method is one of the ways new cryptocurrency projects raise money. They offer a portion of their tokens to early adopters. However, you must conduct adequate research to avoid investing in ICOs and purchasing low-value tokens.
Additionally, you might be the buyer when an asset is listed on exchanges, and the original partners or team members decide to dump their shares, mainly if there are few other buyers. This could result in a massive drop in value and a loss for you. Again, research is vital here to avoid being on the losing side.
Here, a particular crypto asset’s price is artificially raised, frequently through coordinated buying and aggressive social media promotion. You might give other investors a way out if you invest in the asset during the “pump” phase and they start selling or dumping their holdings, which could cause huge losses.
A “pump and dump” scheme with more brutal tactics is called a rug pull. In a rug pull, big players or project developers unexpectedly withdraw the entire amount from the liquidity pool, leaving the other investors with worthless tokens. If you invest money in such a project, you might become a cash cow for these cunny developers.
You aid other traders by contributing to a pool fund through a decentralized exchange (DEX). However, if many traders choose to sell a particular asset for which you have provided liquidity, you might end up with assets with less or no value than you desire.
How To Avoid Being An Exit Liquidity Victim
You can take several measures to prevent yourself from becoming exit liquidity for others through the following ways:
Never Buy Small-Cap Altcoins
A simple and effective course of action is to avoid getting low-liquidity cryptocurrencies into worthless investments. If you are new to crypto investing, do not invest in projects with unrealistically high return projections, particularly those without a track record.
Such projects often attract con artists and hackers looking to exploit unsuspecting investors. Instead, focus on well-established, incredibly liquid crypto projects.
However, the best approach is not to hold Bitcoin alone; you can diversify your investments across the top 10 or 20 crypto assets.
Spread Your Investments Portfolio
Spread your investments across digital currencies with unique value propositions and growth models to diversify your portfolio. This simplifies managing the market’s ups and downs because if one asset experiences losses, gains in another can even up the losses.
Conduct Extensive Research
For those new to the cryptocurrency ecosystem, exercising caution and taking one step at a time is advisable. Always carry out extensive research before investing in any project.
Consider the risks before getting carried away with the excitement of fancy gains. Invest in initiatives with well-established teams, vibrant communities, real-world applications, and transparent plans.
In conclusion, it is up to investors to protect their assets. Hence, considering the risks and taking proactive steps to mitigate them is critical to avoid being a victim of exit liquidity.
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