Please read Part 1 linked at the end of this article first. Arrggghh, that word 'loss' ! Nobody likes to lose but let's have a discussion about 'Impermanent loss' (IL), what it really means, and ultimately why you don't need to worry about it.

The argument of just holding the asset in spot as opposed to placing it in a liquidity pool (Lp) thus liquidity mining, and how it relates to your profits or loss on investment.

Now viewing the above chart it can be seen that versus just holding spot and thus within an Lp profits and losses are not at the same scale. For example from the above chart, say an altcoin goes up 25% what will be the difference between just holding spot and being in a liquidity pool? Short answer: Less profit as the curve downtrends from entry price at the 0% line.

For example: XYZ is $1 and you buy a 1000 of them and hold as spot and you also still have $1000 USDT too (You have $2000). The price goes up 25% thus XYZ are now worth $1,250 and you still have your $1000 USDT (You have $2,250 in total now). In a liquidity pool you add your 1000 XYZ at $1 each and your $1000 USDT, thus you have $2000 dollars in the Lp. The price goes up 25% and your share of the liquidity pool is @$2223.50 (894X$0.25 profit plus original $2000) as indeed it is constantly being 're-balanced'. The 'Impermanent loss' in this case is $26.50 and that is the difference between holding spot versus being in a Lp.

In sum, you lost a potential $26.50 in profit but that's only a little over 1% less than holding spot. But pray, why then do Liquidity mining? Simple, the hour by hour rewards. In an Lp you are making your money work all the time and thus as a holder that's great. Indeed, and over time, your rewards can indeed outstrip your impermanent loss and give you an overall greater potential profit. As a guide too, (compliments of Brinktrade) IL as follows: Prices up 50% IL 2%, 75% up 3.8%, 100% up 5.7% and so on. Don't shoot the messenger as to my above example as it is ballpark but I think you can see why you shouldn't worry about IL when you are in a Lp. For further more technical reading on IL (and used as sources) please copy/paste the links below starting with https too.

brinktrade.medium.com/why-you-shouldnt-care-about-impermanent-loss

docs.alpacafinance.org/alpaca-academy/lesson-5-the-truth-about-impermanent-loss-and-common-misunderstandings

So, with the horrible loss out the way, let's talk about making a profit. Yesterday I opened a Lp in POSI paired with USDT with a view to hodl as a small sideline. Let's see what's happened to that over exactly 24 hours from inception: A day in the life of a Lp to use as by example.

I started with exactly 50 POSI and added the same in USDT value at the time being $138.36, so total when added $276.78 (Total actual investment $277.16 as remember 0.3% commission to buy POSI spot too, but for purposes of explanation I will exclude this 0.3% charge to keep it simple). Look at the left Lp from yesterday: So within minutes as I made some screenshots I was down 63 cents what happened? The spot price dropped a cent or so but now 0.09 more POSI and less USDT by 26 cents. This is the cause and effect of re-balancing in a Lp. I also figured yesterday that my share of POSI earnings may be 0.195 POSI in 24hrs but I indeed earned 0.200 POSI, why so?

Well to answer that question first, my share of the Lp went up from 0.4135% to 0.4271% thus the increase in how many POSI I would gain over 24hrs. This happened as you can guess because more investor's dollars withdrew from the Lp than those added to it. As you can see from the right Lp 'Latest add and unlock' just in those three transactions more was withdrawn than added.

Why is my Lp now is much larger than it was before in 'My liquidity' at $280.90? Simply spot price went up from @$2.77 to @$2.85 or @3% up in 24hrs. So, where am I now? $4.12 up in 'My liquidity, some 1.5%. Hang on that's half? No it isn't as your USDT is always a USDT it's 'stable' thus the gain on the altcoin is indeed as near damn it 3% too bar IL as discussed. But here's why you are in the game: Rewards too! 24hrs has gained me $0.9391 too (0.2 POSI and mostly the rest GT). Just in rewards about 0.34% on my initial investment in a single day being APR 124% and close to the 'Today APR' of 131% in the Lp. Yes, you can see the re-balancing effect here again: More USDT by $2.31 but less POSI by 0.616.

To conclude, don't worry about impermanent loss and don't even worry about re-balancing. Worry about larges crashes in the spot price and maybe re-evaluate your position but don't worry about minor dips as your rewards hopefully make up for this too. This is why your in the game and hope too that the spot price keeps going north as well, but keep an eye from now and then even if your strategy is to hodl long-term.

Links for parts 1 & 3 below:

Please comment below and feel free to say hello to me on BBS.market/GGGXX DM & AMA.

Cheers, CryptoGlyn.