First Mover Asia: Crypto Liquidity Providers Can Be Profitable by Considering Trade Volume, Volatility Other Factors, Data Firm Says

Good morning. Here’s what’s happening:Prices: Ether holds near $1.9K ahead of the Shanghai upgrade; bitcoin hovers near $28KInsights: Becoming a successful crypto liquidity provider requires an active approach that considers trade volume, volatility and other factors.PricesEther Inches Down but Betters Bitcoin

Ether dropped on Thursday but continued this week's trend of outperforming bitcoin.

The second largest cryptocurrency was recently holding steady a few dollars shy of the $1,900 perch it assumed Wednesday, down 1% over the past 24 hours, but up more than 5% from the start of the week when it was lingering below $1,800.

Investors seem increasingly enamored by the Shanghai hard fork, which is slated to occur April 12. The upgrade, also called Shapella, will mark the completion of Ethereum’s full transition to a proof-of-stake (PoS) network, and enable staked ETH withdrawals.

"This hard fork will allow people to withdraw from their validator balance into their Etherium balance, which is great for increased liquidity across the market and accessibility for those that trade in staked Ether," Victoria Bills, chief investment strategist at financial services firm Banrion Capital Management, told CoinDesk TV's First Mover program. "And one thing that we can probably expect from that is a increase in activity across the chain when it comes to Ethereum."

To be sure, some ether observers say the impending unlocking of ETH deposited in the network to boost security in return for rewards will spur a rush of token liquidations. But others maintain that the event could prove bullish for ether because staking and capturing yields directly from the blockchain will become more accessible.

"This is an amazing opportunity for ether and even has shown for its year to date high up," Bills said. "As it continues to become more of liquid and more accessible, we'll probably be seeing a lot more of that asset being traded."

Bitcoin recently dipped below $28,000, off about 2.2%, after spending much of the day above this threshold as it has for most of the past three weeks. The largest cryptocurrency in market capitalization has held steady as investors ponder multiple signs of economic contraction and potential aftershocks of the recent banking crisis.

Other major cryptos were recently in the red, albeit lightly shaded, although popular memecoin DOGE, a big winner after Twitter replaced its blue bird atop its homepage with the crypto's Shiba Inu dog logo, tumbled more than 4.5%.

Equity markets closed mixed with the Dow Jones Industrial Average (DJIA) ticking up but the tech-heavy Nasdaq and S&P 500 dropping 1% and 0.2%, respectively.

Banrion's Bills noted that bitcoin's price has steadied as the banking turbulence has subsided. "Bitcoin had a shoot-up through the roof when we had a lot of turmoil, and then we're seeing it kind of come back to a more steady state around 28K," she said.

InsightsThe Keys to Becoming a Successful Crypto Liquidity Provider

A new research report that crypto data firm Amberdata shared with CoinDesk says that providing token liquidity to decentralized finance (DeFi) applications could be more lucrative than simply holding those tokens.

Liquidity providers are investors who stake their cryptocurrency tokens on DEXs to earn transaction fees, usually in the form of token rewards. Providing liquidity to crypto markets remains a key pillar of the ecosystem – with tens of billions in dollars supplied by users to smart contracts.

But becoming a successful liquidity provider is not as simple as passively depositing assets into a pool and waiting to earn a profit. LPs must address dreaded impermanent loss, smart contract risks and exploits.

The Amberdata report provided detailed analysis of four Uniswap version 2 pools, focusing on their behavior and performance metrics.

The analysis compared the dai (DAI) and ether (ETH) with the ether (ETH) and USD Coin (USDC) pools, which both involve trading ETH against a stablecoin. It also compared theDAI and USDC liquidity pair with a DAI and tether (USDT) pair, which involve trading different stablecoins against each other.

The report found that there were significant differences in the capital efficiency and profitability of Uniswap v2 pools. The ETH/USDC pool had higher capital efficiency compared to the DAI/ETH pool, while the DAI/USDT pool had significantly higher capital efficiency than the DAI/USDC pool.

This was due to differences in liquidity among stablecoin pairs that could be attributed to factors such as market demand, availability and investor sentiment.

The demand for a particular stablecoin as a trading pair can influence the liquidity and trading volume in a pool, and therefore impact capital efficiency and profitability.

Additionally, investor sentiment toward a particular stablecoin, such as trust in its stability or market performance, can also impact liquidity and trading volume.

For traders interested in providing liquidity, Amberdata opined that the factors to consider are the total value locked (TVL) of a pair, the number of trades, or trading volume, per day of the pair, and the characteristics and volatility of the asset itself.

“Our final takeaway is that providing liquidity on Uniswap v2 may be a profitable strategy for those who are looking for a safer way to hold crypto assets,” Amberdata analysts said. “LP strategies perform well in choppy market conditions and do not have significant differences from holding the assets during upward and downward trends.”