Liquidity mining is a great way to keep the blood flowing in your defi portfolio while you’re waiting on a big market move. Of course there are pitfalls, but I think it’s better to take a positive perspective on this topic. If you know when to farm, you will naturally avoid most of the stuff that will lose you money.
Without further ado.
Farm in Sideways Markets
By extension, then, do not farm in bear or bull markets. Why? In a bull market, it's better to simply hold your coins and enjoy the price appreciation. You won't be a sad farmer if everything is going up — you just won't make as much. What's more likely to happen, however, is that you get some of your coins going up while others slide or remain stagnant. The only way that liquidity mining can stay sustainable for the farm owner is pairing coins that have a propensity to move against each other's price. That's the risk you get paid to take — the risk of divergent prices. So just keep in mind that farm owners are purposefully pairing coins that will likely move against each other in a bull market, and that's when you start to lose as a farmer.
Bear markets are self-explanatory, but the speed at which you lose money may surprise you. Not only are you losing from the loss of value in both coins, but you are also losing as the coins in your pool are used to buy whichever coin is falling faster.
I like to think of it this way — yield farming is like selling covered call options. If the market is sideways, you get the cash for holding the shares and the option. If you're in a bull market, you miss out on the upside. If you're in a bear market, you risk losing more value in the shares than you gain in selling the option premium.
Farming After Initial Pumps
The overwhelming majority of defi products' coins produce a chart with a huge initial pump, a big dump and then a slow decline. Many farmers make the mistake of trying to make up for a falling price by yield farming more coins. Big no no. I don't care how much you believe in the project — the price of that coin will keep dropping, and you will lose more value than the farm creates for you. Don't try to outfarm a dump. You will suffer not only the net loss of value, but the economic loss of what you could have been doing with those funds.
Instead, farm projects only when you successfully sell into the FOMO of an initial pump. For instance, if you put in 1 ether on a new dextools entry and get a 3X, consider selling 1/3 of those coins back into ETH. You're now left with 2X the value of what you had. You can split that stack and yield farm with it at no risk to yourself, even if the project coin falls in value. Because you gained enough value from selling the pump to ROI out of the investment, you can now wait out the inevitable drop in price as the project distributes the rest of its coins.
Degen Farming
If a coin doesn't have an initial IEO that you can roll into, you may have to decide whether to farm a shitcoin/valuecoin pair in a degen farm. Don't let the initial APYs fool you. The default tech for Ethereum farms is an algorithm that starts out at a very high APY — mid 5 digits. This APY is programmed to fall to 4 digits within the first hour or two of its existence. Once it does this, you will lose money in that farm. You will have to rely on the use case of the shitcoin, which will create problems for you 99% of the time.
The secret to winning in degen farms is getting in early and going big. You should only enter degen farms if you can catch a 50,000% APY or above. This will give you perhaps an hour or so to gather yield and get out before second wave investors come in and destroy the algorithm. When you see smaller retail investors get in (you can watch the farm's smart contract for this information), prepare to get OUT. There is only one way to produce a 5 digit APY on a farm with a shitcoin, and that's from huge debasement of the coin. Take 20% if you can get it and sell those coins immediately.
Hopefully this will help you avoid many of the traps that catch new yield farmers. No matter the cute graphics on the site or the cute tokenomics in the whitepaper, yield farms are all the same. Get in early, go big, and get out. If you don't get in early enough, get out twice. That's the strategy that works.
