Let me start out by saying that I've never actually employed this strategy, but I've been thinking about it for a couple weeks and I think it's going to turn out really well for me.
The reason I've never engaged in this so-called mystery activity is due to the fact that I didn't really understand how Uniswap worked, nor did I care to. Before the last couple of months, I had only used Uniswap for its main purpose: to swap one coin for another. I had no idea how the yield-farming aspect of it operated. Now that I have a better understanding of the platform, I realize I can take a lot of the guesswork out of my trading game and play this market like a boss.
So let's say we're in the throngs of December and the market is going crazy like it often does in quarter four. Bitcoin does the 'impossible' and goes x3 from where it is today, trading well above all time highs. Ethereum goes even more bonkers with an x5 to $2000. What do you do?
Now, it's very easily to speculate today on what you should do in that situation, but when we're in the shit and the actual reality of it hits us like a ton of bricks, we have a way of letting our emotions get the best of us, leading to potentially totally bonehead plays.
But what if it keeps mooning and I miss the next pump?
As we've seen from times past, no matter how stupidly high crypto spikes we all ask ourselves this question no matter how improbable the outcome may seem. A RATIONAL person would take at least 5%-25% gains with the intention to buy the dip later. Even if we do make that play, when do we decide that the bottom of the dip has arrived and we need to pump that money back into the market? There are so many chances to make mistakes here, and no matter what we do, there will always have been a smarter play in retrospect that we'll often beat ourselves up about.
In months past, my "obvious" solution was to simply cost-average buy and sell during the retail money-flow swings. February and September are often the best months to buy, while summer and Christmas time are often the best moments to take some gains and stabilize our positions.
Say we want to enter or exit 30%. Instead of picking one moment in time and FOMOing/FUDing in/out of the market, we could instead buy/sell 1% every day for 30 days during the given time frame. This is an excellent way of lowering day to day volatility and capitalizing on those bi-yearly swing trades.
Their certainly may be! With Uniswap, we can buy-the-F-ing-dip with an algorithm rather than by hand. We can make our decision and not even have to look at what the market is doing. What's done is done.
If you've ever played Craps you know there are a lot of bets to be made. Don't ask me why, because I don't have an answer, but for some reason I know a lot about Craps for someone who's never played it before.
The most common bet is the "pass" bet. If the person rolling the dice wins, anyone who put a bet on "pass" also wins. However, there is also a "Don't pass" bet that can be made where you bet AGAINST everyone else. Most people don't do this because craps is a social game, and if you win while everyone else is losing they have a way of taking offense. Still, the bet is there and can be played.
Providing liquidity to a Uniswap pool is essentially betting against the market. You become that the "don't pass" guy. You become the house, and as we all know, the house always wins (on average over a long enough time frame).
If the market wants to buy, you're selling, and if the market wants to sell, you're buying. In the event of an Ethereum dip, the market is selling Ethereum, and providing liquidity in this event is the literal definition of buying the dip. Except with Uniswap, you don't even have to think about it, it just happens automatically without all that pesky FUD/FOMO nonsense clouding our judgements. When the ratio of ETH goes up in the pool because people are dumping it, more ETH will appear in your Uniswap Liquidity Pool.
Therefore, this Christmas I will employ said strategy. I actually already sort of wrote about this in my post providing-uniswap-liquidity-as-a-hedge-against-volatility. The DAI/ETH pool is the perfect tool for lowering volatility, because half of your stake as a liquidity provider is a stable coin.
Come Christmas I won't be worried about what the market is doing. I'll be making the smart play. I'll be lowering my volatility rather than try to guess where the market is going.
Not only can we use the DAI/ETH Uniswap pool to buy the dip if we are quite certain the market is about to crash, but also, if we mess up the timing a little bit and ETH spikes up higher, we aren't going to miss out on all those gains like we would have if we exited the market completely. This makes the whole trading scenario much more psychologically viable and less stressful, to know that no matter what the market does we are hedged in both directions. Best case scenario the price bounces up and down furiously with massive volume and we just sit back and collect the exchange fees.
If crypto has taught us one thing, it should be that Min/Max all-in strategy is not a very smart thing to do when dealing with such volatile markets. We should be looking to lower volatility instead and make safe plays to retain our sanity and not go on emotional trading tilt.
Another interesting thing about this strategy are the Uniswap yield-farming fees that get collected. During these large pump/dump cycles is exactly when volume goes through the roof and lots of money is trading hands. It will be very interesting to see how good the yield farming payouts are during Christmas volume compared to the other slower months. It's possible that those fees provide us with the ultimate hedge against losses during said dip.
For example, say I pump $2000 into the Uniswap pool but ETH crashes 75%. Sure, my pool is now only worth $1000, but I also control a lot more ETH than I did before (double) and perhaps I even farmed $250 in the months during the crash due to massive volume. This would make the loss much more easy to stomach.
Again, I haven't actually tested out any of this trading theory, so I'll circle back in February and let you all know how it goes. Until then, trade responsibly.
