This newsletter is sponsored by PHEMEX, the world's best crypto exchange for both spot and leverage. Sign up with the link above and get some free Bitcoin - up to $3600 worth. I really encourage you to check them out.Yield farming percentages can be deceiving.When farming, it’s typical to see APR %s in the thousands and APY %s in the tens of thousands. These flashy returns are extremely enticing to newcomers who hold the token and simply need to deposit them into a pool to start collecting immediate rewards.So what’s deceiving about these high returns? The answer lies in the hidden losses that few farmers are aware of.In a perfect world, the moment you start farming is the moment that you start to see your rewards rapidly grow. These rewards can then be harvested and compounded back into the principal for even bigger returns. What investors are likely unaware of is impermanent loss, which can rapidly outpace gains, ultimately depleting your principal.*The concept of impermanent loss described below is layered and complicated. I only intend to give a brief background and overview for your general awareness.*As a primer, yield farming exists because DeFi platforms use AMMs (automated market makers) instead of traditional order books. AMMs rely on algorithms instead of order matching to maintain their balance. The swap function many of us enjoy and rely on is only made possible by AMMs. The issue is that these platforms and skilled traders are actively arbitraging your stake away to keep the farm in balance. When you deposit to a yield farm, you are generally required to deposit two equivalent values of coins. Two different coins are required so that a pool can allow users to execute swaps. Impermanent loss can be defined as the loss one incurs from entering into a pool and collecting rewards vs. what they would be left with if they just held. Yes, HODLers often outperform yield farmers who still collect high yield! The most important thing to remember is that impermanent loss occurs when the separate values of the deposited coins diverge. I repeat, impermanent loss occurs when the values of the deposited coins diverge.Yes, if one coin’s value rises, and the other stays put, you are actually realizing a loss in the value of your deposit. The system is often working against you. When a farm first goes live with big yield incentives, it attracts a lot of attention and volatility. Remember, spot volatility is not your friend when farming - divergence means loss.The loss is considered impermanent because it is unrealized until you pull out your funds. This is similar to unrealized losses on an asset you hold that has decreased in value. Again, impermanent loss happens when one of the two assets rises disproportionality and can happen at an even faster rate when one of the two assets decreases disproportionately. Impermanent loss does not incur if the two staked coins grow or shrink equivalently in percentage. The odds are incredibly low that their value ratios will remain the same, which is why this phenomenon is very likely to occur. The math behind the calculations of the loss is complex, which is why I suggest you familiarize yourself with the concept along with a loss chart before entering into a farm.If you still want to jump right in, do so with a small percentage of your portfolio so that you can monitor your losses compared to your rewards. Even if the APY is ridiculously high, you can still just as easily end up with less coins or even nothing in a short amount of time.There are a number of ways to mitigate impermanent loss. Perhaps most obvious is to be an incredibly skilled volatility trader with a comprehensive understanding of beta amongst varying assets. Beta can be defined as the measure of an asset’s volatility in relation to the overall market. The second minimization tactic relates to the first, but takes a fundamental approach by utilizing cryptocurrencies in similar sectors for price correlation. You can also look for a pool that accepts stablecoins as one or both of the deposits to reduce the volatility of the two pairs. There are also pools that don’t require a 50:50 deposit ratio of the two coins, and others that offer a lockup to insure 0 losses or double rewards. No two pools are the same, which is why starting slowly and conducting thorough research are essential.Impermanent loss is a difficult concept to grasp and reinforces the idea that anything too good to be true likely is. DeFi platforms rarely advertise this concept, because it deters liquidity providers. Despite the crazy APY offered, spot holders will likely outperform farmers. If you are serious about farming, run the numbers. If it seems too good to be true, it probably is.Enjoy the weekend and be careful farming!In This Issue:Beware Of Impermanent Loss!Bitcoin Thoughts And AnalysisLegacy MarketsIndia Changes Their Mind AgainCoinbase Partners With AdidasThe Wolf Of All Streets Podcast Ft. Hailey LennonMy Recommended Platforms And ToolsIF YOU HAVE ANY ISSUE WITH THE NEWSLETTER OR YOUR SUBSCRIPTION, PLEASE CONTACT: PREMIUMSUPPORT@GETREVUE.CO
The Wolf Den #379 - Beware Of Impermanent Loss!
The Wolf Den #379 - Beware Of Impermanent…
The Wolf Den #379 - Beware Of Impermanent Loss!
This newsletter is sponsored by PHEMEX, the world's best crypto exchange for both spot and leverage. Sign up with the link above and get some free Bitcoin - up to $3600 worth. I really encourage you to check them out.Yield farming percentages can be deceiving.When farming, it’s typical to see APR %s in the thousands and APY %s in the tens of thousands. These flashy returns are extremely enticing to newcomers who hold the token and simply need to deposit them into a pool to start collecting immediate rewards.So what’s deceiving about these high returns? The answer lies in the hidden losses that few farmers are aware of.In a perfect world, the moment you start farming is the moment that you start to see your rewards rapidly grow. These rewards can then be harvested and compounded back into the principal for even bigger returns. What investors are likely unaware of is impermanent loss, which can rapidly outpace gains, ultimately depleting your principal.*The concept of impermanent loss described below is layered and complicated. I only intend to give a brief background and overview for your general awareness.*As a primer, yield farming exists because DeFi platforms use AMMs (automated market makers) instead of traditional order books. AMMs rely on algorithms instead of order matching to maintain their balance. The swap function many of us enjoy and rely on is only made possible by AMMs. The issue is that these platforms and skilled traders are actively arbitraging your stake away to keep the farm in balance. When you deposit to a yield farm, you are generally required to deposit two equivalent values of coins. Two different coins are required so that a pool can allow users to execute swaps. Impermanent loss can be defined as the loss one incurs from entering into a pool and collecting rewards vs. what they would be left with if they just held. Yes, HODLers often outperform yield farmers who still collect high yield! The most important thing to remember is that impermanent loss occurs when the separate values of the deposited coins diverge. I repeat, impermanent loss occurs when the values of the deposited coins diverge.Yes, if one coin’s value rises, and the other stays put, you are actually realizing a loss in the value of your deposit. The system is often working against you. When a farm first goes live with big yield incentives, it attracts a lot of attention and volatility. Remember, spot volatility is not your friend when farming - divergence means loss.The loss is considered impermanent because it is unrealized until you pull out your funds. This is similar to unrealized losses on an asset you hold that has decreased in value. Again, impermanent loss happens when one of the two assets rises disproportionality and can happen at an even faster rate when one of the two assets decreases disproportionately. Impermanent loss does not incur if the two staked coins grow or shrink equivalently in percentage. The odds are incredibly low that their value ratios will remain the same, which is why this phenomenon is very likely to occur. The math behind the calculations of the loss is complex, which is why I suggest you familiarize yourself with the concept along with a loss chart before entering into a farm.If you still want to jump right in, do so with a small percentage of your portfolio so that you can monitor your losses compared to your rewards. Even if the APY is ridiculously high, you can still just as easily end up with less coins or even nothing in a short amount of time.There are a number of ways to mitigate impermanent loss. Perhaps most obvious is to be an incredibly skilled volatility trader with a comprehensive understanding of beta amongst varying assets. Beta can be defined as the measure of an asset’s volatility in relation to the overall market. The second minimization tactic relates to the first, but takes a fundamental approach by utilizing cryptocurrencies in similar sectors for price correlation. You can also look for a pool that accepts stablecoins as one or both of the deposits to reduce the volatility of the two pairs. There are also pools that don’t require a 50:50 deposit ratio of the two coins, and others that offer a lockup to insure 0 losses or double rewards. No two pools are the same, which is why starting slowly and conducting thorough research are essential.Impermanent loss is a difficult concept to grasp and reinforces the idea that anything too good to be true likely is. DeFi platforms rarely advertise this concept, because it deters liquidity providers. Despite the crazy APY offered, spot holders will likely outperform farmers. If you are serious about farming, run the numbers. If it seems too good to be true, it probably is.Enjoy the weekend and be careful farming!In This Issue:Beware Of Impermanent Loss!Bitcoin Thoughts And AnalysisLegacy MarketsIndia Changes Their Mind AgainCoinbase Partners With AdidasThe Wolf Of All Streets Podcast Ft. Hailey LennonMy Recommended Platforms And ToolsIF YOU HAVE ANY ISSUE WITH THE NEWSLETTER OR YOUR SUBSCRIPTION, PLEASE CONTACT: PREMIUMSUPPORT@GETREVUE.CO