The Lack of Marketability Discount (LOMD) is a reduction in the valuation of an asset due to restrictions or impediments that hinder its quick and efficient conversion into cash at fair market value. In crypto investing, this applies to illiquid digital assets, unvested tokens, or positions locked in staking protocols, where immediate liquidation without significant price concession is not feasible. This discount reflects the additional risk and holding period associated with such assets.
Mechanism
This valuation mechanism accounts for the friction costs and time required to sell an asset that lacks a ready market, such as a token with low trading volume on exchanges or a private equity stake in a blockchain startup. For instance, in an institutional RFQ scenario for an illiquid crypto asset, market makers might offer a lower bid price, effectively applying a LOMD, to compensate for the difficulty in offloading the acquired position. The illiquidity premium is quantified based on market depth and historical price impact of large orders.
Methodology
The strategic methodology for quantifying and applying a LOMD involves employing various valuation models, including option pricing models, restricted stock studies, and quantitative assessments of market depth and bid-ask spreads. In crypto, this requires analyzing on-chain liquidity, exchange order book data, and any contractual lock-up periods for digital assets. Investors consider this discount when assessing the true economic value of a crypto investment, factoring in the time horizon and potential costs associated with exiting a position.
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