Getting ahead of myself as we look to the future.
It's no secret that I've been in low-power mode for the last few months as we chop sideways as far back as March. Luckily the light of the tunnel is visible, and that light marks the end of Q3. Did you sell in May and Go Away, anon? You probably didn't, just like I didn't and most others did not. We are degens afterall!
What I'd like to discuss this time around the block is how to avoid fumbling the bag during this cycle and avoid roundtripping all the impending gains that are sure to come our way in 2025, recession be damned! Four year cycle strong, but how can we stem the bleeding of an industry that has such a disgusting habit of losing 75% to 99% of its value with alarmingly consistent accuracy every single cycle?
Automated Market Making as the ultimate tool.
After many hours of research and field testing over the past several years I've come to the conclusion that one of the safest places to be in terms of price exposure is Bitcoin paired to something stable like USDC or USDT. An HBD pairing would be arguably even more exciting but that infrastructure is yet to be realized. Soon™ I'm told.
The thing that makes the BTC/USD pair so good is that Bitcoin is already considered to be one of the world's most risk-on assets in history. The connection to USD lowers the volatility in both directions. Sure, if number goes up you'll make less, but if number goes down you'll also lose less, which is exactly the point of risk-mitigation strategy. Why risk it when playing it safe is a sure thing?
How much loss can we expect to avoid?
When paired to a stable asset the volatility seems to be chopped by a square root. This creates an interesting dynamic in which small moves tend to go unnoticed but big moves escalate to dramatic effect. Imagine we chop sideways for a while and end up +10% after a couple of months. Anyone rawdogging BTC during this time will be up the flat 10%, but the LP holders will only be up around 5% (4.88%). But then liquidity providers earn yield on the volume of that particular pool, paid for by the traders, so by the time everything is said and done that yield can easily make up the remaining 5% and then some depending on how much time has passed.
Streaming swaps increase the yield.
The advent of streaming swaps is likely going to flex its power during the next big rally. Using this feature it is possible to essentially make huge multimillion dollar orders on DEXes like ThorChain and Maya without incurring a massive amount of slippage and losses we would expect on a normal swap. In essence, streaming swaps allow layer-one DEXes such as these to leech liquidity from the entire ecosystem/world using arbitrage. So not only can the orders themselves accommodate more than ten times the volume that they could previously, but also the arbitrage orders used to balance out the prices doubles that volume, and by necessity doubles the fee that the liquidity providers earn.
Now this might not be the biggest of deals now, but I guarantee you it will be when the FOMO kicks in and volume becomes absurd. This is because both the bull market year and the subsequent bear market year (presumably 2025 and 2026) are very high volume years back to back. First, the market pumps and creates extreme FOMO, then the market dumps and creates equally extreme FUD. Both of these events create massive flows of fees for liquidity providers.
Swinging early
So say we are expecting a peak around November of the bull market year which has been pretty consistent across 2013, 2017, and 2021. Will 2025 be different? Maybe. Maybe not. The point is that it doesn't matter much when employing a risk reduction strategy like this. It's better to start selling BEFORE the peak hits a little bit at a time with a DCA strategy. Yeah the number will continue going up and that may be demoralizing to some, but at the same time we're still making money because half of the assets are still crypto (in this case BTC).
Personally I think this cycle is going to blow the power law model that's been floating around on social media completely out of the water. Which means that all these Power Law bros will be selling aggressively around $150k-$250k, but it will just keep going up. Still, this would not be a bad time to start a tiny position and get the mitigation strategy started. After all... we may not be able to predict the top, but it is much easier to predict that a certain price point is totally unsustainable and guaranteed to fail as support during the impending bear market. Can we agree that when Bitcoin gets to $200k that we'll almost certainly see $200k again sometime down the road? That's for we as individuals to decide.
Set it and forget it.
Another extremely understated mechanic of AMM yield farms is that they automatically buy and sell based on a smooth-curved algorithm. This makes management during the bear market much easier than manually trying to do it. Why? The emotion and FUD run rampant during that time. It's much easier to HODL and do nothing than it is to actively manage an account. The chance of making a mistake during a flood of FUD is quite high (like last-minute revenge trading) which is a variable that often goes unaccounted for when choosing a particular strategy.
For example lets say that Bitcoin got to some crazy valuation in 2025 during the summertime. Say... $400k. That's a target I'll be watching closely if it happens. This would be a great time to start DCAing into an LP position. Doesn't matter if Bitcoin continues spiking to $1M or even $5M; we still make money on the way up, just not as much... that and we are all but guaranteed to see $400k again if it continues higher.
Then if we expect something like a 75% crash during the bear market this LP will only be down 50% from the tippy top, which is pretty good in the world of crypto. If you only lose half your money from the top you're still filthy rich in most circumstances (which is why many continue holding because "this time is different"). And we still haven't accounted for the yield that the LP provides. It's possible, or even probable, that such a pool would earn something like 30% APR during a 12 month bear market. That 30% APR would offset at least 15% of the 50% losses. So now instead of losing half our money (from the tip tippy top) it might only be one third.
So imagine, if you will, a tool which allows us to conserve that much value from the top of the market... while at the literal bottom of the market. At that point we'd be tempted to get out of the LP and just start rawdogging Bitcoin all over again.
To give an example there were like 50 opportunities in 2021 to cash out at $50k. This strategy would have mitigated our losses greatly while the price of Bitcoin was trading at $16k during those few months after the FTX collapse. Remember how terrifying the prospect of buying was back then? It would have been much easier if we were all in a more comfortable position such as the one described, but in the end it is just all gambling (often in retrospect). Actually executing such a move is much easier said than done, but the current tools available make it significantly easier.
Systemic risks we love to ignore
The problem with liquidity pools, be it on centralized or decentralized infrastructure, is that they create massive honeypots that hackers would love to drain. We haven't had a big hack in a while but it would be foolish to assume that the systemic risk to these platforms is zero when LPs on Thorchain have already been hacked multiple times during the early days. Have they plugged all the holes? We hope so!
BTC/USD pair doesn't exist?
On layer one chains like Thorchain and Maya all assets are paired to the Rune or CACAO, making it difficult to even find a good option for staking BTC/USD. We could always stake something like RUNE/USD instead of BTC/USD but alts have always proven themselves to be more volatile on the downswing. While we might expect BTC to tank 75% during the bad year it's more appropriate to expect RUNE to pull something like a 90% loss, which makes the strategy for mitigating risk not nearly as effective (unless the pump to peak was absolutely massive and 90% down still ends up being better overall).
wBTC?
There are plenty of wrapped Bitcoin options on EVM chains like Ethereum, BSC, Polygon, and AVAX. These assets do have the BTC/USDC, BTC/USDT, and BTC/DAI pools, but the wrapped nature of the Bitcoin poses yet another systemic threat. In fact, now that it's being reported that Bit Global (in partnership with Justin Sun) is taking over wrapped Bitcoin... MakerDAO has passed a vote no longer allowing wrapped Bitcoin to be used as collateral to create new DAI loans. Smart move, obviously. Nobody needs that level of risk on their plate.
What about the stable coins?
Not only is wrapped Bitcoin and the underlying exchange a systemic risk, but also the stablecoins themselves. Just because it hasn't happened yet doesn't mean a big stablecoin like USDC or USDT can't crash to zero for a litany of reasons. In fact, I almost suspect something like this will happen during the next bear market. Always expect fuckery when it comes to crypto and centralized control.
Considering these three totally independent ways that an LP position can crash to literal zero we really have to wonder just how worth it a strategy like this is in the long term. Clearly we can't bet the farm and put everything we have into a position like this, but smaller positions are fine I'm sure. I'm just trying to point out that there's a reason why people HODL and just accept the 75% loss during the bear market. We've yet to solve these issues for true self-custodianship with zero extra risks tacked on.
Conclusion
Crypto is absolutely riddled with survivorship bias. We tend to look at the one in a million lottery winners and ignore every loser that it took to get there. Even then these winners tend to fumble the bag and lose it all given enough time in the trenches, which we also ignore. The best way to navigate a volatile and risky environment like this is to mitigate the volatility and risk, but the emotion that permeates the space constantly screams at us to do the opposite. Max bet max bet max bet!
2025 is going to be an absurd year for crypto.
Will we fumble the bag yet again?
Probably!
This time is not different.