Illiquid Assets

A concept of liquidity has been especially important since the 2008 crisis. 

Liquidity refers to ease with which an asset can be bought or sold or “liquidated” – turned into cash. The term can be applied to all financial markets and asset categories. 

One of the most important characteristics of an asset is the speed with which it can be converted into cash. A liquid asset is therefore an asset that can be sold quickly without significant loss of value. Bank account balances are liquid assets. Most stocks are also considered liquid assets because even they can be turned into cash quickly because there is always a readily available market to sell them.

An illiquid asset is the exact opposite. It cannot be disposed of quickly, is difficult to dispose of or cannot be disposed of without suffering a significant loss. In the wake of the 2008 subprime debacle, for example, investors discovered that certain financial instruments – credit derivatives in particular – were very difficult to convert to cash. The resulting crisis was unprecedented: Some buyers who had contracted products before the crisis could no longer find counterparties who were willing or able to buy them.

Examples of illiquid assets: Some assets are just inherently illiquid: real estate, works of art, private company interests and certain types of debt instruments. Crypto currencies are very liquid assets today, but there was a time when liquidity in this type of instrument was hard to find.