General Questions · Basic level · 3 min read ·
What is liquidity?
Liquidity is how quickly you can turn something into money without losing part of its value. Cash is fully liquid; a property much less so, because selling it takes time. A participation in a private project has low liquidity: there is no market where a buyer is always available.
In 30 seconds
- Liquidity measures the speed and cost of turning something into money.
- Something illiquid can sometimes be sold fast, but often at a lower price.
- Participations in private projects have low liquidity.
Why should you care?
Having value is not the same as having money available. Liquidity is the distance between the two.
- You separate money you may need soon from money that can sit still for years.
- You avoid having to sell something at a bad price because of an emergency.
- You understand why a private project asks for a long horizon.
Think of it as water and ice
Water you can pour right away; a block of ice is the same water, but you have to wait for it to melt or break it and lose pieces. Cash is water; an illiquid asset is ice: it has value, but it doesn't flow when you need it.
How does liquidity work?
- 1
Speed
How long it takes from deciding to sell to having the money.
- 2
Cost
How much value you give up to sell fast: discounts, fees or paperwork.
- 3
Market
Whether there is a place where someone is always willing to buy. For a private project there isn't.
- 4
Exit
In a private participation, money arrives at the project's exit or if you transfer your participation to someone else, as the agreement allows.
An example with numbers
Illustrative personal-finance arithmetic, unrelated to any project, in millions of pesos: someone with expenses of 3 a month and 25 saved wants to keep 6 months of expenses in something liquid.
| Monthly expenses | 3 |
|---|---|
| Months of cushion | 6 |
| Reserve that must stay liquid (3 × 6) | 18 |
| Total savings | 25 |
| What could sit still for years (25 − 18) | 7 |
First cover what you may need soon; only what's left over makes sense in something with low liquidity.
Where do you see it at Circular Urban?
Your participation in a Circular Urban project has low liquidity: it is not freely tradable and there is no market where a buyer is always available. Money comes back through distributions and at the project's exit, or if you transfer your participation to someone else. The risk declaration explains this before you subscribe.
- The risk declaration you sign before subscribing, which describes liquidity risk.
What changes in your finances once you get it
You keep your cushion apart
You hold what you might need in an emergency in something liquid.
You participate with money you won't need soon
You use resources that can stay put until the project's exit.
You think about timing before amount
Before deciding how much, you ask yourself when you might need that money.
Common mistakes
- Myth
If something is worth a lot, I can have that money whenever I want.
- In reality
Value and liquidity are different. A valuable asset can take months to sell, or sell fast at a lower price.
- Myth
There will always be someone interested in buying my participation.
- In reality
There is no market where a buyer is always available. Transferring your participation depends on finding someone and on the agreement's conditions.
- Myth
Low liquidity means the project is doing badly.
- In reality
No: it describes how easy it is to leave early, not how the project performs.
Test yourself
Someone spends 2 million pesos a month, wants 6 months of liquid cushion and has 20 million saved. How much could they place in something illiquid without touching the cushion?
Keep learning
This content is educational. Every participation carries risks inherent to the project, including the possibility of partial or total loss, and results are subject to each project's actual performance.
