Earning while Ignoring the Crypto Market Volatility as a Hodler

I have been a long-term hodler of ETH for a few years during the bear market cycle. And, I realized the problem of hodling assets like BTC/ETH during those times is that I suffered a loss in value relative to the US dollar without earning anything to compensate for. Hodling 1 ETH ends up having 1 ETH, nothing more.

During the bull market, as the price goes north every single day, nobody cares about it. But I need to prepare myself for a possible crypto winter cycle as we already had during the 2018–2020 period. Some people might suggest having an exit strategy in which we will sell a portion of our portfolio when the price reaches certain targets. I do have. But some questions arise:

• What do we do with the remaining portfolio that does not reach the target prices? If we sell when the price goes down, there are chances that we will sell at the bottom and have to buy it back at a higher price. We will never know what’s the bottom price is until everything is settled.
• What do we do with the money that we sell our assets for? This is kind of easier to answer. We can do whatever we want :) But if you don’t wanna spend it, eventually you’ll have to think about how to invest it unless you want the inflation to eat up your purchasing power.

Recently, I found about Uniswap and the idea of being a liquidity provider (LP). To simplify, being a liquidity provider means you provide a pair of tokens you have to a pool (e.g., ETH and USDC) to facilitate trades and earn a portion amount of each trade as a fee. For example, when the ETH price is at $2500/ETH and a trader trades 4 ETH for 10000$, 0.3% of the trade (~$30 USD) will be divided among all liquidity providers proportional to the amount of liquidity they provide. If your amount of liquidity represents 10% of the pool, you’ll get $3 as a fee. Check here for more information.

After doing some research, I find it super intriguing to join the system as an LP. Some benefits of being an LP (for hodler scenario):

• You can earn fees in both bull and bear markets. When the price changes across exchanges, traders have incentives to arbitrage by making trades. The worst scenario is when the price goes sideways and the volume is low, we earn very little fees but it’s still better than earning nothing.
• In Uniswap v3, you can set a price range in which you can all-in or all-out to a single token. For example, if you provide 5 ETH and $10000 USDC to ETH/USDC pool, you can set the price range of ($500, $10000) in which you provide liquidity to traders. Interestingly, if the price of ETH goes down to $500, all of your USDC will be converted to ETH. It’s like you dollar-cost-averaging your USDC into ETH, hedging ETH to the moon someday :). Otherwise, if the price of ETH reaches $10000, all of your ETH will be converted to USDC, meaning you already reach your target price. It’s time to take out the profit. :)
• As a long-term hodler, you don’t have to sell your assets in a bear market while earning a bit more.

Chart 1: Impact of impermanent loss

However, there are also some catches we need to consider:

• Impermanent loss: In short, when you provide liquidity, the amount of two tokens you provide keeps changing due to token price variation. So if at any point in time, if you want to withdraw your position, the amount of two tokens you get will not be the same amount that you provide. The loss occurs when the total value you withdraw (maybe in terms of USD) is less than the value when you hodl the tokens without providing them to the liquidity pool. Often time, the fees will cover the loss but if your token price suddenly jumps 5x overnight compared to the price when you provide liquidity to the pool, your total value will be 25.5% less than the value in the scenario where you hodl the tokens in your cold wallet. You can check chart 1 to see how impermanent loss impact your total value when the price changes. Also, check this site to understand more about this kind of loss. In my opinion, this is a pretty good trade-off between profits and time wasted for earning nothing during a cold crypto winter period. Also, for coins/tokens like ETH, it’s unlikely to gain 5x overnight so the probability of having a severe impermanent loss is pretty low.
• Security risk: Defi systems like Uniswap are pretty much in the early stages and pose a lot of risks. We often find headlines like this “DODO DEX Drained of $3.8M in DeFi Exploit” all over the time. Do your own research, check if the projects are audited or not. Even if the projects are audited, it does not mean it’s 100% risk-free. Question if you can trust the team and the system or not. High rewards always come with high risks. Do not put more than you are willing to lose.

I personally did the experiment myself by providing liquidity on Uniswap v2 during the time period from January 27 to May 29.

Table 1: Experiment with Uniswap

Table 2: Loss/Profit Analysis

During that time, I made 3 transactions to provide 5912 USDC and 4.00071 ETH to the pool as shown in the green boxes in Table 1 and the first three rows in Table 2. At the end of the period, I withdraw 8684 USDC and 3.5924 ETH out of the pool to migrate to Uniswap v3 as shown in the red box in Table 1.

In total, I provided $11898 including 5912 USDC and 4.0071 ETH to the pool at different eth prices. On May 29, I withdrew $16923 including 8683 USDC and 3.59235 ETH out of the pool at $2294/ETH.

So to compare to the scenario in which I hodl the entire portfolio of $15104 including $5912 USDC and 4.00071 ETH at $2294/ETH. I did have a profit of $1819. In the end, I made around 15% in return in just 4 months. It seems to be low compared to buying some other new projects to gain 5x, 10x, 100x but as a hodler, it’s still better than gaining nothing.

One thing we should be wary of is that we were in the bull market during that period of time so I expect the earning will be less when we go into the bear market.

That’s my journey so far with Uniswap. I hope you’ll find this article interesting and informative.

Beware that I’m not a financial advisor, don’t take anything I said above as financial advice. I did my research and my experiment for myself. Do your own research, take your own risks, and hope the best for you. Cheers…