The Million-Dollar Memecoin Catch: Lack of Liquidity Poses Risks for Crypto Investors

A PEPE Token Holder's Paper Gains Could Remain Unrealized Due to the Difficulty of Selling Low-Liquidity Tokens, Highlighting the Importance of Considering Liquidity when Investing in Crypto.

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A cryptocurrency investor exchanged 0.125 ETH, worth $250, for 5.9 trillion tokens, PEPE, four days ago and those tokens are now worth $1.02 million. One could describe this transaction as the deal of a lifetime, however one detail comes to change the scene.

The holder of PEPE tokens will find it difficult to reap this profit due to the lack of liquidity around this token. While the investor holds $1.02 million in tokens, PEPE, it is found that there is a difference between the valuation of the assets “on paper” and the actual cash available at the time you wish to sell.

“With 5.9 trillion tokens, PEPE, in its portfolio, it will take 46,200 years to liquidate these assets, always assuming demand does not decline,” Grzegorz Drozdz, market analyst at Conotoxia Ltd, said, adding: “Any attempt to exit the position more quickly could lead to a price drop, even below the initial purchase price.”

The analogy

Drozdz likened this problem to “billionaires seeking to make money from their wealth”, adding: “An attempt to sell wealth could lead to a collapse in their share price.”

It is similar to a previous case where Gurgavin Chandhoke created a memecoin called Pump Coin, which shot up to $4.8 billion, with him owning 99% of the tokens. However, due to lack of demand in the market, Chandhoke was unable to sell his token.

“The issue with low-liquidity tokens is not only the lack of buyers, but also the fact that liquidity is usually concentrated in automated pools of traders,” Adrian Hetman, head of expertise at Web3 ImmuneFi’s Bounty Bug Bounty platform, told Decrypt.

As he explained, the issue is due to “the presence of sufficient liquidity in the pool rather than the availability of buyers. For the PEPE holder, the sale amount represents a significant portion of the liquidity pool, resulting in a significant drop in the token price during the transaction. As a result, the gains will not be close to the value one would expect based on the price at the time.”

PEPE is a Memecoin with a Pepe-the-Frog theme. While the rise in PEPE’s price has turned some early buyers into millionaires – at least on paper – the lucky investor in our story has yet to sell his tokens.

Consequently, the whole story teaches us that when buying any token, we should always take into account the liquidity it has and therefore how easy or difficult it will be to sell it when we want to. Plus all the other things we need to consider and which we have mentioned several times in our previous topics.


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