The Liquidity Illusion

Shiny Thing$ #219: The Liquidity Illusion

^{Rob Petrozzo, for Rally}

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Here at Rally, we’ve been a bit quiet lately. 

That’s because we’ve been building and preparing for the next phase of the platform - one that (without giving too much away just yet) sits at the intersection of museum-grade collectibles and the public markets where the world’s most valuable companies trade every day. The goal is straightforward: bring more attention and accessibility to the collectible-alts space, and make it easier to own equity in the things people truly care about.

But there’s another goal - one that we’ve heard from users and investors since day one: liquidity.

On its surface, that’s obvious. Any marketplace needs volume and money has to move. For as long as I’ve been designing products, the analogy I’ve always leaned on is “no one wants to eat at an empty restaurant” - and finance is no different. Liquidity creates confidence, participation, and price discovery.

But the kind of liquidity people imagine (instant, infinite, always-available) isn’t always what it seems. The 24/7 always-on markets we’ve grown accustomed to thanks to crypto have a way of masking what liquidity really is, and when it actually matters.

We all want the ability to get in and get out whenever we choose. That’s the promise. But the deeper question, and the one we care most about as a platform, is simpler and harder to answer: what is this really worth?

In collectibles, value has often been a guess. A comparable sale of a similar item at auction isn’t truth - it’s just the last moment someone decided they were done owning something. The liquidity implied by that price can feel real, until it isn’t.

And thats where the conversation in the office led us this week in the 219th installment of Shiny Thing$, where I’m giving a little uneducated (but experienced) dissection of the “illusion of liquidity.”

Everything is liquid until it isn’t

Liquidity is one of those words that sounds objective but behaves emotionally. People talk about it as if it’s a property an asset has, like weight or color. Liquid. Illiquid. Binary. Safe. Risky. But in reality, liquidity is a mood. Everything feels liquid when prices are rising and apps are responsive, and someone else is always one click behind you ready to buy what you’re selling. In those moments, markets feel infinite and an exit at the exact price you want feels guaranteed. Value feels obvious.

But the illusion breaks the second you actually need to sell. That’s when liquidity stops being a feature and starts being a question: Who’s on the other side of this trade right now?… Are they there at this price?… Am I late and they’re early?… Am I showing my hand with this ask?

Liquidity isn’t proven when you buy. It’s proven when you try to leave, and most people don’t discover that difference until it’s too late.

Thats partly because modern finance trained an entire generation to believe that liquidity is permanent. You open an app and see a price. There’s a button. You assume the distance between the two is trivial. Swipe in, swipe out. It’s that easy. 

But what you’re really seeing is potential liquidity, not guaranteed liquidity. A quote is not a promise and a bid is not a buyer. This is how bubbles get oxygen. It’s especially true in the world we live in today where algorithmic trades account for an estimated 60%+ of daily trading volume - meaning that bid can disappear quicker than you can hit the confirm button, turning your market order of the “perfect price” into an instant loss. 

That’s also how people mistake activity for depth. They assume because something is trading, it will always trade - especially for them. Until one day it doesn’t. The moment everyone decides they’re done at the same time, liquidity reveals itself for what it always was: a temporary agreement among strangers to keep playing. When that agreement dissolves, the app still opens and the number still updates, but the exit quietly disappears. For NYC mayor Eric Adams memecoin scam last week is a perfect example 👇

After launching what he called “NYC Token” - a Solana memecoin with a goal of “fighting antisemitism and anti-Americanism” (wtf???) - the tokens total value spiked to over $500M. At the top and without warning, Adams’ team removed the entire liquidity pool (a pre-funded block of tokens/cash locked in the token's creation contract, which allows for users to trade the memecoin automatically), extracting $3.3M and crashing the token by nearly $450M. If you opened a memecoin price app and took a look at the price action after the rug-pull, it just looked like a bunch of numbers and trades. If you were affected by the outcome, you saw how fragile and how fake “liquidity” can really be.

Auctions often tell the truth markets try to hide

This is where auctions, for all their faults and the sometimes-archaic methods of pricing item estimates, are brutally honest. At auction, liquidity is not implied - it is exposed, publicly, in real time. Even if the names of the buyers aren’t disclosed, there’s no pretending and no dark pools and no algorithms smoothing the edges. For in-person auctions in particular, there are literally hands raised in the room. Theres one bidder, two bidders, 50 bidders… or none. 

When something goes unsold at auction, it doesn’t mean it has no value. It means there wasn’t a buyer at that price, on that day, with that urgency. That’s a “clean” lesson. Contrast that clean in-the-room model with mark-to-model markets, where assets are “worth” $X on paper until the moment someone actually tries to sell them and finds out you may only get $Y. Funds that report smooth returns quarter after quarter, until liquidity is tested and the math changes overnight. 

Auctions remind us of an uncomfortable truth: Price is not what something last traded for. It’s what someone will pay RIGHT NOW. Everything else is hope, memory, or marketing.

Timing holds it all together…

People often confuse liquidity with speed. They think liquid means “fast” (I actually use it this way at times accidentally too, and don’t even realize it until later). In reality, liquid means predictable. A truly liquid market isn’t one where you can sell instantly, it’s one where you can sell without surprise. That typically means tight spreads with trusted (human) participants, in a repeated behavior.

That’s why some assets that trade every second still feel terrifying to sell, while others that trade rarely feel stable. It’s not about frequency, it’s about confidence in the exit.

This is also why collectibles confuse people. They look illiquid because they don’t trade daily, but the best collectibles often have deep, durable demand that shows up over decades, not minutes. When they sell, they sell deliberately and often with conviction. The liquidity isn’t a function of how often something trades, it’s a function of who cares when it does. 

Thats the reason a new generation that expects instant returns hasn’t fully committed to the space yet and still aren’t the ones in the rooms at the biggest auctions. But everyone gets a little older and a little wiser eventually. 

The human cost of believing the illusion

The most damaging part of the liquidity illusion isn’t financial. It’s psychological.

Believing an item is liquid just because you’ve seen a bunch of big ‘Buy-It-Now’ prices on eBay or because theres a lot of conversational liquidity on the internet makes you reckless with time and planning. You delay decisions. You assume you have much more optionality that may not exist down the line when you need it most.

And when liquidity vanishes, people don’t just lose money - they lose confidence in their own judgment. The betrayal feels personal. It happened to me personally during the 2008/09 financial crisis when I, like many, sold the bottom. During the pandemic low, I tweeted about what I did next and got absolutely dragged because the internet is full of people who consider themselves financial geniuses. 

But in reality, I was doing what everyone does. I thought I was smart, then realized I wasn’t when the liquidity dried up. And I was left with zero confidence in making new moves that may have drastically changed my present day. The post-mortem thoughts of 99% of people (particularly those who are new to investing like I was at the time) after selling into a less liquid / much-lower-than-expected-exit always sound the same:

“I thought for sure I could get out.”
“I shouldn’t have waited this long to sell.”
“I didn’t think everyone else would sell at the same time.”

Markets don’t lie. We just hear what we want to hear when things are looking good.

The truth is that liquidity is a privilege, not a right. It comes and goes. It rewards preparation and punishes assumption, and it never announces when it’s about to leave.

But thats where remembering a few things when the music is still playing becomes important… 

The smartest people in the market (see: calmest, most patient) don’t ask, “How liquid is this?” They ask: who is the buyer when conditions change? Why would they still care? What happens if I’m early and what am I going to do if this loses value on paper? What am I doing if it turns out I’m late?

Understanding those potential outcomes and your own emotion doesn’t make markets easier to navigate, but it definitely makes them more honest. As an investor in anything, that’s more valuable than the illusion of an easy exit, and it reinforces decision making with conviction. 

Because when the music stops, the only thing that matters isn’t what something was worth. It’s whether someone is still standing on the other side of the trade.

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Until Next Week…