Impermanent Loss: Why Might You Lose While the Price Goes Up? 📉🤔

Imagine you put your coins in a liquidity pool, and the price of Bitcoin skyrockets, but when you withdraw your funds, you find your profit is less than if you had kept them in your wallet! How did this happen?

💡 The equation is simple:

When you provide liquidity (for example, $ETH and $USDT), the pool maintains a value balance of 50/50.

If the price of $ETH rises sharply, traders (through arbitrage) will pull the cheap ETH from your pool and place USDT in its place.

The result: you end up with less ETH and more USDT than you started with.

📊 A quick numerical example:

You put in 1 ETH (priced at $1000) + 1000 USDT. (Total $2000).

The price of ETH jumped to $4000.

If you had held onto them in your wallet (HODL) = you would have $5000.

In the liquidity pool (due to rebalancing) = you only have 4000$ .

💔 The loss here is 1000$ (compared to regular holding).

🎯 Is it a final loss?

It's called "impermanent" because it disappears if the price returns to its original level at deposit. It becomes "permanent" only at the moment you withdraw the liquidity.

👇 A question for the professionals: Do you prefer to risk IL for high returns, or do you prefer to work with stablecoin pairs?

⚠️ DYOR - Not Financial Advice