A large chunk of the world’s wealth today is locked in illiquid assets. The total size of tokenized illiquid assets, including real estate and natural resources could reach $16.1 trillion by 2030, according to the Boston Consulting Group (BCG). What are illiquid assets? Why are illiquid assets important? Let's delve into these questions.
What are illiquid assets?
A liquid asset is one that can be quickly sold without a significant loss in value; an illiquid asset is one that can’t be quickly resold without a significant loss in value. For example, holdings in a bank account are liquid assets. Most stocks are also considered liquid assets because, even though they are not actual cash, there is a readily available market to sell them quickly.
Illiquid assets are assets that cannot be easily sold for cash in normal market conditions. Examples of illiquid assets include property, infrastructure, private equity, and private debt. Illiquid assets may be hard to sell because of a lack of ready purchasers and/or an actively traded market and/or they may be difficult to value. Illiquid assets tend to have greater trading costs and volatility, and as a result can pose a greater risk to investors than readily tradable investments, with regard to liquidity.
Why are illiquid assets important?
Illiquidity is essential to many aspects of both accounting and investing. From an accounting perspective, reporting liquid assets is a requirement of many different forms of financial disclosures. Outside of accounting, liquidity is a key element of price setting in any market. Liquid assets tend to be fungible, like stock certificates or bonds, and tend to exist in very busy markets. These two features generally give rise to well-established and transparent pricing. When you go to sell a liquid asset, like a diamond, you generally know what it’s worth and will typically have little trouble getting that market price for your property.
Illiquid assets, on the other hand, tend to be infrequently traded and are often unusual or unique. This makes the market for these assets far less established and underscores the importance for investors to know the liquidity risk of an asset before they buy it. Instead of relying on the prices that buyers and sellers set within the last hour (or the last few seconds even, as on a stock exchange), you may have to judge an asset’s value by prices set months ago.
What are illiquid assets and why are illiquid assets important? Hope this article can provide you with a better understanding of this topic.
