Investing in blockchain technology offers unprecedented ROI potential. But like any other investment, you need to learn as much as you can to make smart decisions. In this article, we’re discussing the concept of impermanent loss and how it can affect your blockchain investment strategy.
What Is Impermanent Loss?
In simple terms, impermanent loss happens when there is a difference between the market price and the AMM price of tokens.
Why is it called impermanent? Why not just call it a loss?
Because there are ways to get your money back. For example, you can counteract it with trading fees. Also, the market and AMM prices could become equal again or return to their original cost. When this happens, you earn 100% of your trading fees, and your loss disappears.
Why And How Does Impermanent Loss Happen?
To dig deep into impermanent loss, we first have to talk about Decentralized Finance (DeFi) and Automated Market Making (AMM).
According to cryptocurrency news experts, a lot of projects now depend on DeFi protocols. Examples of these are Uniswap and other AMM platforms.
DeFi is a set of liquidity protocols that allow people with funds to become market makers and earn trading fees. They don’t have to go through the traditional centralized intermediaries. This leads to frictionless economic activities.
But this also means that some consumers have to deposit their own assets into liquidity pools. If you do this, your assets will be locked in these pools.
Now, the cryptocurrency investment space is still developing. Therefore, expect the value of your deposited asset to undergo changes since your initial deposit. This change exposes your investment to impermanent loss. The more significant the change between the market price and the AMM price, the greater the loss.
How Do You Avoid Impermanent Loss?
Technically, the loss will only become permanent if you withdraw your tokens at a lower dollar value. But investors still dread it because it can eat into trade incomes or leave you with too many negative returns. So what do you do to avoid it? Here are some tips:
- Choose blockchain companies wisely. Pick those with liquidity pools that stay within a relatively small price range. This will lessen the risk of impermanent loss.
- Invest in liquidity pools that have at least two stablecoins. You will not get crazy returns, but you will not lose money either.
- Provide liquidity to pools that have their own tokens. This will allow you to join in liquidity mining programs and incentivized pools. You will get the chance to earn tokens and trading fees at the same time.
- Wait for the exchange rate to go back to normal. Price changes are expected in any market. Even if you feel you’re at a loss, sometimes you just need to wait for the right time to withdraw your liquidity.
Make Smart Investments in the Blockchain
If you’re new to blockchain technology, impermanent loss may seem like a scary concept. After all, no one wants to lose money. With Key Coin Assets, you don’t have to worry about that at all. How does a guaranteed 40% ROI sound? With our data-backed blockchain investment experience, you can trust us to make that happen for you. Contact us NOW at 843-886-9547 to start investing in yourself!