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I've Played The CubFinance Game Partially Right

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@reonarudo
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I made a mistake in investing money at $5 in the CUB-BUSD liquidity pool. I did recoup much of the value by accruing rewards but not completely. Clearly it would've been a better decision to wait until the price bottomed out after the second reduction in CUB inflation. My mistake was caused by my not anticipating the depth of the correction.

But I think I made the right call around the time CUB seems to have bottomed out at $2. (Thanks for calling the bottom, @edicted!) I got out of the CUB-BUSD pool and went all in on the CUB-BNB pool.

That's because when you hold all your value in a pool where the other coin is a stablecoin and where the non-stablecoin gains in price, you lose out on gains in value because the pool auto-trades your non-stablecoins for the stablecoins as the price of the non-stablecoin goes up. When the price gains of the non-stablecoin are extreme, so will your losses in terms of opportunity cost be.

The opposite holds when the price of the non-stablecoin of the pair is going down. That's because what a price change means in a liquidity pool is that the number of coins on one side of the pool relative to the number of coins on the other side changes. For instance, if there are 1,000,000 CUB on one side and 5,000,000 BUSD on the other, it means that 1 CUB = 5 BUSD. When BUSD leave the pool while the number of CUB in it stays constant, the pool is made up of fewer BUSD relative to the number of CUB, which is when a certain percentage of the pool has to contain more CUB. I noticed how the number of CUB in my share of the pool fluctuated and usually went up during the downtrend that reversed at $1.87.

The reason why took everything out of the CUB-BUSD pool and reinvested all the money in the CUB-BNB pool around the time the price of CUB bottomed out is that I believed the price of BNB would go up, which it has as part of the recovery of the entire market. That's when you want to be out of the stablecoins and in the non-stablecoins. If the price of BNB goes up, I will end up in possession of more CUB because BNB will leave the pool where it will sell for a better price. Or if more liquidity is added, it will be done with CUB and BNB being added in proportions where the number of CUB relative to the number of BNB is greater than initially. The price of CUB expressed in BNB will go down. However, I believe more demand for CUB will come from the other pools, which will be doubly good as both coins and thus my share of the pool will grow even more in value.

What keeps the prices, or in the case of liquidity pools, the ratios of the tokens in them in alignment with the any other pools or exchanges in the rest of the world, is the possibility of arbitrage. Anyone who adds liquidity to a pool, will do so with the two tokens added in proportions that match the price in the rest of world. If someone makes a mistake and adds enough liquidity to move the price appreciably, they will lose money because savvy investors - or more likely bots - will detect the difference and make money on arbitrage thereby restoring the original correct proportion and eliminating an opportunity to correct the mistake.

The good thing about being a liquidity provider in addition to the CUB rewards is how the contract auto-trades the appreciating side of your share of the pool for the coin that is not moving or is moving more slowly or is moving to the opposite direction. When the movements reverse, the opposite happens. I believe that in a bull market like we're in now, different coins tend to take turns moving up. When you're a liquidity provider to a pair, you will never blindly FOMO into a coin like a fool only to sell a top. Instead, you'll make steady progress while collecting liquidity provider fees along the way - so long as you have picked the right pool containing two coins that will both actually make gains.

Posted Using LeoFinance Beta