🧘‍♂️ The Solution

Market Meditations | July 6, 2021

To one of the biggest problems

Dear Meditators

⏰ A few months ago we shared a guide titled How to Yield Farm

✅ Today, we focus on a key risk of Yield Farming: Impermanent Loss and how to best protect yourself and your profits.

? We also share the hottest crypto market news and a very special podcast with Bitcoin Birch!

Read, enjoy and share with your network. Let’s all build wealth together.

Delighted to say this article is brought to you by FTX. Make sure to use our link to get a 10% discount. Based in the U.S? Here’s a discount link for you: FTX.US.

☄️ 5 Things You Should Know 

In a rush? Here are 5 things you should know about the crypto markets today: 

  • Latest Dose of China FUD ??
    BTC experienced a sell-off overnight which some analysts are attributing to the latest dose of China FUD. Specifically, China’s central bank closed down a Beijing-based company providing software services for virtual-currency transactions and reiterated that no institution under its jurisdiction should engage in such transactions.

  • Solrise Finance Raises $3.4 Million☀️
    Solrise Finance, a fund management and investment protocol based on Solana, said it raised $3.4 million in a funding round that included Alameda Research.

  • New Big Money?
    London-based hedge fund Marshall Wace, with $55 billion in assets under management, reportedly plans to invest in the crypto sector.

  • Sygnum Bank now offers Ethereum 2.0 staking service ?
    Swiss crypto bank Sygnum has launched an Ethereum 2.0 (ETH2) staking service, claiming to be the first bank to offer this service. 

  • World Economic Forum: ‘Blockchain can help dismantle corruption’ ?
    In a publication released on July 5, 2021, the World Economic Forum (WEF) has detailed how blockchain technology can help reduce corruption in government systems. 

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?‍♂️ Cleaning Your Liquidity Pool

?‍♂️ What Is Impermanent Loss

Unfortunately, providing liquidity in DeFi isn’t quite as simple as just depositing, earning high yields and forgetting about the investment. Impermanent loss can occur and impact your profits. Impermanent loss = when you deposit funds into an automated market maker (AMM) and the price of your tokens change relative to each other. The bigger this change is ➡️ the larger the impermanent loss. 

⚠️ TIP: don’t be fooled by the name. It’s only considered impermanent because it’s unrealised until you withdraw your funds. At the time of withdrawal, the losses can be very much permanent.

To better understand this, let us use an example as provided in Unmask Crypto?

  • We deposit 1 ETH and 1,000 USDC in an ETH/USDC pool. Assume that there’s a total of 10 ETH and 10,000 USDC in the pool. The total liquidity in the pool is 20,000, and we have a 10% share of it.

  • Suppose the price of ETH increases to 4,000 USDC. Arbitrage traders will keep removing ETH from the pool and adding USDC to it until the ratio of the assets in the pool reflects that price. (For more on crypto arbitrage trading check out our guide.)

  • If 1 ETH is now worth 4,000 USDC, the ratio between the ETH and the USDC in the pool has changed. There is in fact 5 ETH and 20,000 USDC in the pool now.

  • So, what happens if we want to withdraw? As we know, we have a 10% share of the liquidity in the pool. This means that, right now, we can withdraw 0.5 ETH and 2,000 USDC. That’s 4,000 USD, and we made some nice profits from our 2,000 USD deposit, right? Not quite. If we simply hold our original deposit of 1 ETH and 1,000 USDC, we’d now have assets worth 5,000 USD!

☝️ So this is how a loss in dollar value looks as a result of impermanent loss. This risk of providing liquidity can be off putting. As we have seen, for most AMMs, if there’s sustained price divergence between the time you deposit and withdraw liquidity, you’ll underperform a simple buy and hold strategy! Fortunately, there are ways crypto investors can mitigate impermanent loss. 

? How Can Crypto Investors Mitigate Impermanent Loss

1️⃣ Consider Uneven Liquidity Pools 

Uneven liquidity pools give you the freedom to employ asset ratios beyond the usual 50/50 split. Balancer is known for providing this flexibility. Allowing for 80/20 splits, for example. As explained on Balancer’s medium: With a 5x change in price, the impermanent loss for a standard 50/50 pool would be 25.4% whereas in a 95/5 pool it would be only 3.88%, over 6.5 times smaller ?

2️⃣ Select Assets That Remain In A Relatively Narrow Price Range 

Providing liquidity with coins that do not have price fluctuations (e.g. stablecoins) allows you to benefit from the rewards of liquidity providing without worrying as much about impermanent loss. In contrast, crypto assets such as ETH are not pegged to the value of an external asset, so their value fluctuates per market demand.

Curve Finance is a good place to provide liquidity with a smaller risk of Impermanent Loss. As well as stablecoin pools, Curve also has a pool for different wrapped versions of BTC (we know that WBTC, renBTC and sBTC should remain in a tight range compared to each other).

3️⃣ Use Single-Sided Pools 

Not all liquidity providing opportunities in DeFi come via two-token liquidity pools. There are also single-sided pools or staking pools such as Bancor. Staking pools are used to guarantee protocol solvency and only accept deposits of a single type of asset.

Here, you only deposit one token. Naturally, you’re not exposed to impermanent loss (there is no ratio balancing between two assets).

? Conclusion

DeFi and liquidity providing are here to stay. So too is impermanent loss. Much like the rest of the crypto space, for those who are willing to educate themselves and take precautions there is a lot of reward. We should be aware of the risks and the solutions at our disposal when it comes to mitigating them. It is precisely these challenges and barriers to entry that make the rewards high for those who can prevail. So prevail! 

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? Who Blocked Binance?

Which UK Bank has blocked payments to Binance?

  1. HSBC 

  2. Natwest

  3. Barclays 

? CryptoPunk Contest

Liquidifty recently garnered attention for having launched an NFT marketplace curating work from artists on Binance Smart Chain. Early this morning it was announced that a new contest hosted by Liquidifty is in full swing, where the top prize is CryptoPunk #6691, an NFT from perhaps one of the most famous and well known NFT series out there in the crypto community. 

Packs can be opened only after all 10,000 are sold. Previous contests such as this one sold out in under three minutes, which reinforces the idea that demand, at least in the past, has been strong. Additionally, there will be no empty packs and the contest itself doesn’t limit how many packs can be purchased. 

For traders and investors, it seems that the last price on record for CryptoPunk #6691 was north of $40,000. On the other hand, it’s nice to see contests like these playing a hand in driving more awareness and mainstream adoption of NFTs, empowering artists to continue producing and sharing their creative work. Consolation prizes in this contest, for example, consist of NFTs from collections such as Bored Apes, Pak, XCOPY, Steve Aoki, only to name a few.

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? From Nothing To Building A 9 Figure Company with Bitcoin Birch

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Joel Birch (@BitcoinBirch) is a successful entrepreneur, investor and cryptocurrency influencer. He’s the co-founder of Stacked, a startup that automates cryptocurrency investing.

3. Barclays

Following the recent Financial Conduct Authority (FCA) announcement on 26th of June stating that “Binance Markets Limited is not permitted to undertake any regulated activity in the UK” , Barclays have now suspended all bank transfers to Binance. One user posted his thoughts to twitter. Since coming out with their ban they have stated that there will be no restriction on withdrawals.  

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Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here

Disclosure. Some of the links we’ve included are affiliate, they give you rewards and discounts and earn us a commission. Additionally, the Market Meditator writers hold crypto assets. See our investment disclosures here.