A Framework for Liquidity Risk in Digital-Asset Portfolios
Market risk asks how much a position can lose. Liquidity risk asks how much it costs, and how long it takes, to get out. A practical framework for both.
A portfolio can be well diversified, conservatively leveraged, and still suffer severe losses if it cannot exit positions when needed. Liquidity risk is the gap between a position’s marked value and what can actually be realized, within a required time, under the conditions prevailing when the exit is needed.
Three dimensions
- Cost: spread, fees, and market impact for the full position size.
- Time: how many hours or days are needed to exit without exceeding a cost threshold.
- Fragility: how much cost and time deteriorate under stress.
Measuring each
Cost can be estimated from band depth and impact curves. Time can be estimated by expressing the position as a fraction of typical daily volume and applying a participation limit. Fragility is best estimated from historical stress windows: how far depth fell and spreads widened during past sell-offs for the same asset and venues.
The key discipline is to calibrate to stressed conditions. Liquidity that exists on an average day is not the liquidity that will be available on the day an exit becomes necessary.
“Liquidity is a coward. It is never there when you need it.”
This publication is provided for informational purposes only and does not constitute investment, legal, or tax advice, or an offer or solicitation to buy or sell any asset. Live figures are computed from third-party public market data and may be delayed, incomplete, or inaccurate.
