Exit liquidity in crypto refers to the buyers needed for sellers to exit their positions, especially at elevated prices near market tops. In every trade, one person's profitable exit requires another person's entry...often at a worse price. The phrase gained prominence as a warning that "diamond hands" culture and late FOMO buyers often provide exit liquidity for smart money taking profits. When whales or institutional investors want to sell large positions, they need sufficient demand (exit liquidity) from retail buyers to absorb their supply without crashing the price.
Example:
In late 2021, Bitcoin reached $69,000 as record numbers of retail investors opened exchange accounts after seeing crypto on mainstream TV. On-chain data revealed long-term holders and whales were systematically selling to this new wave of buyers—the retail buyers provided "exit liquidity" for smart money taking profits. Those who bought at the top provided liquidity for sellers' exits, then watched Bitcoin crash 75% to $16,000, illustrating how exit liquidity flows from uninformed late buyers to informed early sellers.