The crypto market has various concepts that must be known and understood for a stable and successful investment. Several times trends arise just to misguide the uninformed masses and following these trends can eventually lead to an ultimate loss. There are certain people in the blockchain trade known as the whales, they know how to navigate the market to their advantage, if you are a smart crypto trader, you can avoid being misguided by getting the right information.

Exit Liquidity is one of the resultant effects of misguided traders. To understand the concept of exit liquidity, there is an illustration that is commonly used in simplifying this term it is called “ The Theory of the Greater Fool”. The greater fool’s theory contends that the price of an inflated item, or even one with no fundamentals, will continue to grow as long as the owner can sell it to a "greater fool." However when no more fools exist, the asset price will undoubtedly decrease. In simple terms, if a person is carrying an object of low value, they can pitch this item to an ignorant person as a valuable asset. This person is also able to sell to another, and the chain continues. However, when there are no more ignorant people, the valueless object represents a loss to the person who has it, as it was purchased at a worth that cannot be regained.

In the case of cryptocurrency, when liquidity is low, the whales won't sell their assets to prevent a crash. Instead, they will navigate the market trends to boost the liquidity of their assets by building excitement around the tokens they wish to sell to do this. If the hype is effective, investors may be drawn in by their fear of missing out (FOMO). Whales can sell their assets without fear of a sharp decline in value because there are willing purchasers who understand the volatility of the crypto market and know their ways around it. The price gradually begins to decline once the whales sell their holdings. Because they purchased the assets at a premium price, the standby buyers risk losing money if they hang onto or sell their assets later than planned. This standby buyers or investors are referred to as "exit liquidity."

Therefore, exit liquidity refers to investors that purchase assets that early investors sell at a premium rate, making it easier for these early investors to cash out of their tokens.

The understanding of exit liquidity is a clear warning of things to beware of in the crypto world. Given that we understand the term exit liquidity, we can deduce that it points to a loser at the end of the chain. How can you avoid being one? Read this article till the end.

Exit Liquidity: How to Avoid Being One

Exit liquidity events might happen in a variety of ways, but they always lead to the same outcome. The exit liquidity of founders, venture capitalists, and early investors are regular retail investors. In the previous and recent years, they have appeared in the forms of Initial Coin Offerings (ICO), Pump and Dump, Rug Pulls, NFTs, Yield farming, etc. All of these forms of liquidity have certain rules and conditions attached.

To avoid falling victim to exit liquidity, you must engage the following procedures as a crypto trader:

Use only trusted exchange platforms: These platforms carefully vet the traded assets with great scrutiny before listing them. And it eliminates tokens with hazy backgrounds.
Risk Management: To avoid great loss in crypto investments, you need to apply risk management measures to your investments. Divide up your initial capital based on how much risk you can take. Presume you can deal with losing all of your capital.
Thorough Researching: Although having a source of information is good, as an investor, you must be willing to do further research about what you’re investing in. This is to help you get an in-depth knowledge of what you are putting your money into.
Beware of FOMO: The fear of missing out (FOMO), is one of the drivers of ignorant investors, and it can result in exit liquidity. One good way to steer clear of FOMO is to track news and opinion about the asset. This will help the investor to be up to date on the newest information and help them to move fast if something goes wrong.

Conclusion

Liquidity is a crucial aspect of any asset; it relates to how easily and fast you may acquire or sell it without losing a significant amount of value. More liquidity is preferable in cryptocurrency, as it is with other traditional assets.

However, exit liquidity refers to unfortunate retail investors who are duped into purchasing worthless coins or tokens from founders or early investors as they exit their positions for cash. Hence as a crypto trader or investor, you need to watch out for things authentic information and ensure to put risk management measures in place to avoid being one.