The Best Way to Yield Farm as a Bull Market Approaches — MUST read
The recent rise of Bitcoin to surpass $21K is increasing interest in cryptocurrency investing. And with new investors, and also returning investors, there will inevitably be a renewed interest in yield farming. As most savvy investors know, owning cryptocurrency and holding it is so 2019. Today, investors who know, know that letting your crypto work for you is the way to increase your gains. And, there is no better way in DeFi space to reliably increase your position than yield farming. But, don’t fall into the traps of yield farming that can limit your gains as prices rise. And, if they don’t continue to rise yet, the techniques in this article will set you to gain while you wait for the bull market to officially commence.
First, let’s look at trading volumes on the major exchanges for the past month:
Trading volume has greatly increased since mid-December (purple is Coinbase, but I’m looking at overall). This coming bull market will see a new level of education in the crypto space. Many investors have seen the cycles and ridden the roller coaster enough to trust the cycles and will want to maximize gains by getting into the DeFi space to participate in yield farming.
If you are new to yield farming, or need a primer, this article is for you.
If you’re getting into yield farming, or if you’re already in yield farming and want to reconfigure your holdings, it’s important to be aware of a concept called impermanent loss. If you’re seeking an in-depth discussion on that, read this. Here’s the simple version:
Impermanent loss in yield farming refers to the potential loss of value for liquidity providers caused by fluctuations in the price of the assets being traded on a decentralized finance (DeFi) platform.
Here’s what this means. If you hold two coins for a certain amount of time, you experience their gains and losses fully. But, if you yield farm and pair 2 coins together in LP tokens, you could LIMIT the GAINS you might get compared to holding them separately. Impermanent loss: 2 when paired coins gain/lose at different rates, you lose value.
If you’re yield farming, you might be making up for this from the rewards tokens that you receive. For example, if you earn a bunch of CAKE tokens on Pancakeswap while farming BNB/BUSD LP, your CAKE gains may outweigh your Impermanent Loss.
Let’s keep this simple. I’m going to reveal my strategies for minimizing impermanent loss while approaching a Bull Market, where prices are generally rising. (No market prediction here! Just concepts).
If you feel the market is going to increase:
Don’t use ANY LP tokens that where a surging crypto is paired with a StableCoin. The price difference between the surging crypto and stablecoin is going to grow dramatically in a bull market and your impermanent loss will be high. It’s likely that your reward tokens will not make up for the loss you could experience.
To fully take advantage of the upcoming bull market:
Only use LP tokens where BOTH paired tokens are likely to rise. Look for ETH/BTC or BTC/BNB. You could go a little more risky and look for DOGE/BNB or ADA/BNB, but I wouldn’t invest a lot of money in obscure crypto LP tokens. This way, as the coin values rise, you’ll ALSO be earning rewards tokens, and you’ll be experiencing litte impermanent loss.
Here’s a more in-depth explanation:
To mitigate impermanent loss, pair two high-profile crypto coins in a liquidity pool (LP) token. By holding a token that represents a pool of two coins, investors can earn rewards while also reducing their exposure to impermanent loss.
For example, if an LP token is composed of Bitcoin and Ethereum, and the value of both coins increases in a bull market, the LP token will also increase in value. In addition, the investor will be earning the reward tokens for providing liquidity to the pool. Because the value of the LP token is dependent on the value of both underlying coins, there is less chance of a significant loss due to fluctuations in the value of one coin.
This strategy is not without risk, as the value of the LP token is still affected by the overall market conditions. However, by pairing two high-profile coins in an LP token, investors can reduce their exposure to impermanent loss and increase their chances of earning a return on their investment.
Pairing two high-profile crypto coins in an LP token is a strategy that can help mitigate the potential for impermanent loss in yield farming. By holding a token that represents a pool of two coins, investors can earn rewards while also reducing their exposure to impermanent loss caused by fluctuations in the value of one coin. This strategy can be a useful tool for investors looking to earn a return on their crypto investments while also managing risk.
What about using two stablecoins in an LP token?
This is a strategy that is used for retaining value. Stablecoins are designed to keep their value, but they are not going to take advantage of market conditions. In essence, they are great ways to avoid the bear market, but they also avoid the bull market. A possible strategy would be:
As the market recovers, begin Dollar-Cost-Averaging your LP tokens from more-volatile to less-volatile. If you’re farming with ETH/BTC, and you have seen significant gains, start to convert some of the ETH/BTC to USDC/BUSD LP. You likely won’t see APRs as high as ETH/BTC, but if there is a market crash, you’ll be more immune to it, and you’ll retain more of the value that you gained.
Ideally, you could predict the exact peak of the bull market, and convert all your volatile LPs to stable LPs at exactly the top, retaining all the value that you gained. But, that’s not realistic, and Dollar-Cost-Averaging can be applied to LPs tokens too, in the way that you convert from one asset to another!
I hope that when the bull market comes, you are prepared to fully take advantage of the gains, and not let a stablecoin drag you down!
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