Bienvenidos mis ositos, tu siempre eres mis queridos! (Welcome back little bears you are always my dears!)
I’ve been struggling with the question when is the best time to be a liquidity provider?
There’s a few ways to answer this question depending on what kind of cryptoassets you intend to trade.
If you’re only going to trade stablecoins you can provide liquidity at any time.
The fear of impermanent loss is almost eliminated when you provide liquidity for stablecoins.
For volatile cryptoassets though, please consider a few factors before aping in.
Liquidity mining incentives are probably the most important factor. You should consider both the quantity and quality of the rewards.
“What does that even mean Panda?”
Well, quantity is probably easier to understand. In my opinion any pool that has an APR over 50% is still decent to be in. But that’s just me. For those of you that have more degen tendencies nothing less than 1,000% will get you out of bed.
There are impermanent loss calculators out on the internet so if it’s something that really bugs you can do some calculations to see if any fees and rewards you collect will exceed your potential impermanent loss.
Then you have to consider the quality of the fees and or rewards. Generally I prefer native “gas” tokens, projects I like or stablecoins. Basically anything with a utility or something that can be sold quickly in case of an emergency.
For example if I have some money in a layer 2 solution like Arbitrum or Optimism, I would place some funds in a WBTC-ETH pool. Now this is probably a boring pool for a lot of readers but this pool feels safe to me.
Let me explain. As of the date of this writing, Bitcoin and Ethereum are the two top dogs in the crypto space. They both have deflationary aspects and should hold or grow in the years to come. If I have WBTC-ETH in a liquidity pool I won’t care which asset gets liquidated in favor of the other because I like both.
This is speculation on my part but in case Arbitrum or Optimism ever releases an airdrop token (they both currently have no plans for one) I would like to be eligible for one. Again this is just speculation. If there is nothing I will still be happy collecting trading fees from being a WBTC-ETH liquidity provider.
You can also consider a utility token paired with a stablecoin if you like contrarian trading. Let’s take the ETH-USDC pair as an example. Imagine if Vitalik decides to fast track ETH 2.0 and it cures baldness, cancer and erectile dysfunction.
You will likely see a huge breakout in Ethereum BUT you will likely see a lot of USDC in your pool because people have FOMO and are buying up your ETH. The reverse is also true. Imagine if someone spreads some fake news that Vitalik had a terrible accident.
There would probably be some FUD in the market and ETH would drop like rock. Your ETH holdings would increase in your pool while your USDC would be drained.
IF you can handle volatility AND are willing to trade against the crowd consider initiating liquidity pools after a huge breakdown or parabolic moves upward.
Intuition plays a part too. For example if I see a lot of FUD or shill articles from fellow 0x bloggers or on your social media feeds I’ll take a look on the charts to see if there’s a crazy move up or down to look for an entry point.
Watch out for no name cryptoassets that you might regret holding for a few years. Of course this just my opinion on being a DeFi liquidity provider but I wanted to share some ideas in the hope that it might help someone.
Be sharp, stay hungry let’s get that money!
