The Liquidity Premium

People underestimate, and undervalue liquidity.  There is always a liquidity premium in a market.  Even in very liquid markets like listed stocks, there is a liquidity premium. When volatility goes up, the spread between the bid and offer might increase.  The amount of stock for purchase or sale will almost certainly decrease.

Having less liquidity requires that purchasers get a better price.  It’s one reason why Bitcoin got to such a high price.  As soon as futures were listed, some of the risk for holding Bitcoin went away and the premium required came out of the market.  There are those that might say Bitcoin was overbought and the market was due for a break and that might be true.  We don’t know that for certain.  We do know that as soon as people were able to hedge their risk of holding the asset, the price dropped.

The same can be said for other non-liquid assets like art and real estate. Private equity and venture funds both have risk premium associated with them.  This is why it was sort of interesting to me to see Carta make an announcement on their future plans to create a marketplace where illiquid securities that reside in the accounts of investors will be traded.  One of the things I am looking for if they can create a liquid market is a decrease in the valuations of venture-backed companies.

Why?

Because you can trade away some of the risk of holding them.

Eventually, a derivatives market could coalesce around a liquid cash market for venture-backed securities.  That will draw more money to venture because of the decreased risk.  Tokenizing the market might be a way to do it.