Is Keeping Your Funds In A Liquidity Pool A Good Idea When The Bear Market Hits?
We're in a Bitcoin mega bull year right now. The mining reward halving was last May. The supply shock caused by it has been felt rather strongly over the last 7-8 months. Bitcoin and the rest of the crypto space are in a full blown speculative rally as we speak.
But every mega bull year is followed by a bear market where the price of Bitcoin enters into a steep correction to the tune of 70-80% and where the rest of the space corrects 90-99%.
It makes perfect sense to cash out into fiat or stablecoins before the bear market begins. If history is any guide, that should happen in the last quarter of this year.
But selling your stack is taxable income. In case you don't want to sell everything and you have a stake, let's say, in the CUB-BUSD pool, how would the value of your stake change as a result of the bear market?
When you have stake in a liquidity pool you have exchanged both of the coins that you have initially for a coin that represents a share of the pool. The amount you have does not change even if the coins in the pool change in value.
Let's say your share is worth 100 CUB and 1000 BUSD at the top. The price of CUB is then $10. Cub goes down 50x during the bear market and is worth 20 cents at the bottom. Will you have 50x the number of CUB you had at the top? No, because BUSD will leave the pool. The pool contract will auto-trade your BUSD for CUB gradually as the price drops. You will definitely have a lot more CUB in your possession than you'd have if you'd just held the CUB. Another thing to take into account is the yield. Let's say it's 1.11% per day. Let's assume that the bear market lasts 365 days. It usually lasts about a year. Your APY (Annual Percentage Yield) would be 55x if you compounded everything. But this is complicated further by the falling price of the underlying asset, CUB. Further, the daily yield is taxable income. You may choose not to pay your taxes but if you cash out, you may need to account for the origin of the funds when the money hits your bank account so you should take that into account. But then again if a lot of capital leaves the pool in a bear market, your APR will skyrocket as your share of the rewards will grow.
All I can say it's a complex dynamic. Parking at least what you owe in taxes as BUSD would seem prudent if you ever plan to cash out your earnings. Running an experiment with a small amount of money sounds like an interesting way to find out what happens.
Posted Using LeoFinance Beta
