Let’s say you bought $1 million worth of OM tokens when the price was $0.20. A few days later, the price rose to $2. Your $1M investment is now worth $10M.
You’re aware that during a major FUD or bearish sentiment, altcoins can crash by 30%-50%. Even when you bought the OM token, you knew its liquidity wasn’t great.
You notice OM token has been in an uptrend for quite some time. But looking at the daily trading volume, it seems odd that such a price increase could happen with this low volume.
Anyway, you kept holding and now the token is priced at $2, making your holdings worth $10M.
Now, some exchanges are willing to give you a loan using your OM tokens as collateral — typically 50% or more of the token value. The condition is: if the price of OM falls close to your loan value, your collateral will be force-sold.
So, you leave $10M worth of OM tokens as collateral and borrow a $5M USDT loan.
Later, OM’s price shoots up to $9, making your token holdings worth $45M.
Since you’ve already taken a $5M loan, now you can borrow another $17.5M if you want.
That means you now have a total of $22.5M in loans. The exchange will only liquidate your position if OM drops from $9 to $4.5.
You knowingly take this risk because you understand that if you try to sell $45M worth of OM tokens on the market, the price could crash to even $1 due to low liquidity.
If you attempt to sell the full $45M, you might end up receiving less than $10M.
Because liquidity means how much value you can actually get out when selling a token. So instead of selling, you’re happy taking a loan.
To help those who don’t understand liquidity, here’s a snapshot from the UNISWAP DEX.
It shows that OM token’s liquidity is $1.5M (marked with a green circle).
Now, even if you have $10M worth of OM tokens, you can’t withdraw more than $1.5M from there — that’s your real max retrievable value.
So what do you do?
You know that exchanges like Binance, OKX have better liquidity.
So you go to OKX and start market selling your $40M worth of OM tokens. You know that placing limit orders will take forever to sell the full $45M.
So you open a short position and start dumping OM on OKX.
You sell gradually on the market. It’s Sunday — usually a slow day in the market, institutions are off too.
Due to fewer buyers, your $100K sell causes the price to drop not by 2%, but by 7%.
Result: a death spiral begins.
Many institutions and individuals had taken loans with OM tokens as collateral. When the price dropped to $4.5, exchanges began forced liquidations.
That caused further price drops, triggering even more liquidations. Eventually, OM fell by 90%.
This kind of catastrophic downfall happens when there’s low liquidity. But there can be a silver lining — like what the OM team did.
When a team sells their own tokens, they usually do it OTC.
OTC means: you and I know each other, I sell you tokens at a 50% discount on the condition that you can’t sell them on the market for 1 year.
So, the team sold $50M worth of OM tokens OTC for $25M USDT. Then they started buying back OM tokens from the market with that $25M.
Due to low liquidity, even a $1M buy could push the price up by 10%. That 10% price increase raises the market cap by $100M.
Over 3 months, the team slowly injected $25M and the token price went up 10x. Because the team has an unlimited supply of OM tokens.
They again sold $100M worth of tokens OTC at a 50% discount and started buying on the market.
You’re no fool either — you know you can’t sell for a year, so you also used your tokens as collateral and took a loan.
Anyway, someone smart figured all this out and on a Sunday, jumped into the market. Opened a short position, and began dumping.
Maybe they didn’t even need to sell more than $10M — the rest happened due to panic selling by other holders and cascading liquidations.
That person profited from their short.
Now keep in mind, which coins have the highest liquidity in the market?
Of course, BTC is number one.
Here’s the English translation without any bold text:
⸻
Let’s say you bought $1 million worth of OM tokens when the price was $0.20. A few days later, the price rose to $2. Your $1M investment is now worth $10M.
You’re aware that during a major FUD or bearish sentiment, altcoins can crash by 30%-50%. Even when you bought the OM token, you knew its liquidity wasn’t great.
You notice OM token has been in an uptrend for quite some time. But looking at the daily trading volume, it seems odd that such a price increase could happen with this low volume.
Anyway, you kept holding and now the token is priced at $2, making your holdings worth $10M.
Now, some exchanges are willing to give you a loan using your OM tokens as collateral — typically 50% or more of the token value. The condition is: if the price of OM falls close to your loan value, your collateral will be force-sold.
So, you leave $10M worth of OM tokens as collateral and borrow a $5M USDT loan.
Later, OM’s price shoots up to $9, making your token holdings worth $45M.
Since you’ve already taken a $5M loan, now you can borrow another $17.5M if you want.
That means you now have a total of $22.5M in loans. The exchange will only liquidate your position if OM drops from $9 to $4.5.
You knowingly take this risk because you understand that if you try to sell $45M worth of OM tokens on the market, the price could crash to even $1 due to low liquidity.
If you attempt to sell the full $45M, you might end up receiving less than $10M.
Because liquidity means how much value you can actually get out when selling a token. So instead of selling, you’re happy taking a loan.
To help those who don’t understand liquidity, here’s a snapshot from the UNISWAP DEX.
It shows that OM token’s liquidity is $1.5M (marked with a green circle).
Now, if you hold $10M worth of OM tokens, even if you want to, you won’t be able to extract more than $1.5M from there.
That $1.5M is your real maximum retrievable value.
So, what do you do now?
You know that Binance, OKX, and similar exchanges have higher liquidity.
So, you begin selling $40M worth of OM tokens on OKX at market price. Because you know if you wait with a limit order, it’ll take forever to sell $45M.
Instead, you open a short position on the exchange and start selling on OKX.
You start market selling bit by bit. It’s a Sunday — usually the market is quiet and institutions are off.
Since there are fewer buyers, your $100K sell drops the price by not 2%, but a full 7%.
Result: a kind of death spiral begins.
Many institutions and individuals had also taken loans using OM as collateral. When OM hits $4.5, exchanges start forced selling.
The price drops even further, and more loans get liquidated. Eventually, OM crashes by 90%.
This kind of catastrophic downfall can happen when liquidity is low. But there’s an upside — like what the OM token team did. When a team wants to sell their own tokens, they usually do it OTC.
OTC means — you and I know each other, and I’ll sell you tokens at a 50% discount under the condition that you can’t sell them in the market for at least a year.
In this way, the team sells $50M worth of OM tokens in OTC for $25M USDT. Now, with that $25M, they start buying OM tokens back from the market.
Due to low liquidity, if they buy with just $1M, the price might go up by 10%. When that happens, the market cap can jump by $100M.
They slowly inject the $25M over 3 months, and the token price increases 10x. Because the team has no shortage of tokens.
Then they sell another $100M worth of tokens OTC at a 50% discount and start buying again from the market.
You’re not any less clever — you know you can’t sell before a year, so you also use the token as collateral and take a loan.
Anyway, after understanding all this, a very smart guy gets into the market on a Sunday. Opens a short position, then starts dumping on the market.
Maybe he didn’t even have to sell more than $10M — the rest of the price crash came from panicked holders and liquidations.
He made money from his short position.
So, keep in mind — which coins have the highest liquidity in the market?
Of course, BTC first. Then ETH.
XRP, DOGE, and recently SOL — all have good liquidity. ADA also has decent liquidity.
With these coins, you could sell $100M and still exit without impacting the price much.
Or just sell OTC at a 10% discount — there will always be buyers.
Just having a high market cap doesn’t mean high liquidity. As I’ve said before, market cap is kind of a myth — a total bluff.
Trump token hit a $70B market cap, but its liquidity was barely around $200M. Not even $1B.
And arbitrage only happens when there is liquidity.
What is arbitrage, really? I’ll explain that another day. For now, just know that because of arbitrage, the price of a token stays roughly the same across all exchanges.
No matter where you sell, arbitrage bots immediately buy/sell to adjust the price and make profit.
Without arbitrage, token prices would vary wildly from one exchange to another.
Got it? Or did it seem too complex? Let me know in the comments. I need to know.
