The possibilities in liquidity pools? Understand Risk/Reward & Impermanent Loss

Liquidity pools are not as easy as investors think. By investing here you can definitely get good profit but only if you have proper knowledge and understanding about it.

Today I will try to explain liquidity pools a little and clear some doubts people have.

Liquidity pools are a great investment idea in the Hive ecosystem where you can use your invested tokens or invest new tokens for continuous passive income and long term wealth gain.

First remember that you should know how to access platforms like TribalDex, Hive Engine and similar exchanges. The steps are very simple.

You just need to log in to Hive Engine using your Hive account. Then buy the tokens you want to invest in the liquidity pool.

My recommendation is to use Hive Engine although you can also buy from TribalDex, LeoDex and other Hive exchanges.

If I want to create a pair of HIVE and COLONY and put it into a liquidity pool so that traders get liquidity and I earn passive income from their transactions this is what I do..

First I buy both tokens on #Hive-Engine. Then I go to TribalDex and access the liquidity pool option. There I create a pool and add liquidity by selecting the token pair (for example SWAP.HIVE and COLONY).

After that I add liquidity. Let say if I have 10 HIVE I might need around 5000 COLONY tokens (just an example).

By doing this I am providing liquidity to traders. When people buy and sell in the market and their transactions are completed using my liquidity I earn passive income from every trade.

Also if you think longterm you can get good profit because currently Hive price is low and COLONY price is also very low. In the next 3 to 4 years there is a high chance their prices may increase.

But it is very important to understand some things.

So far I talked about profit but loss is also possible and this is called impermanent loss.

What is impermanent loss? It is a temporary loss that reduces your wealth.

For example if I invest in HIVE and COLONY (what will happen)

Case 1: If HIVE price goes down and COLONY stays stable my COLONY investment keeps converting into HIVE until HIVE recovers.

Case 2: If COLONY price goes down and HIVE stays stable my HIVE investment keeps converting into COLONY.

Case 3: If both HIVE and COLONY prices go down then there is no conversion between them but your total wealth decreases.

As long as you do not close your position it is not a realized loss so there is no need to worry. But if you close it then the loss becomes real.

If your plan is longterm investment then do not worry about these ups and downs. Focus on your goal which is wealth growth.

Sometimes HIVE pumps 3x and COLONY stays stable and sometimes COLONY pumps 2–3x while HIVE stays stable. This also creates good trading opportunities and helps your wealth grow.

What do you people think about Liquidity pool? have you ever invested here? Will be glad to see your answers in the comment section.

I hope you find this post useful and informative.. If you do, please remember to reblog it so that it reaches as many people as possible and that they can benefit the most from it. Also remember to upvote which will help me financially and grow my account.

IMAGE TAKEN FROM TRIBALDEX CANVA

Thank You!
Best Wishes.