So you've finally taken the leap into DeFi and you're excited to be making some profits with your investments. However, you've noticed your $1000 LP tokens is sinking in value. What gives? Here are 3 reasons why you might be losing value:
As users pull/add money into pools, you'll see either your LP token value drop or gain, respectively. This is a normal occurrence with all pools. Do your research on the best token pairs/triplets in pools to ensure its a sound, long-term investment.
Pools consist of at least two token pairs (ex. ETH - USDC) and deposits into the pool is what helps created a borrowing/lending market. However, if your token pair is, for example, ETH - Squid Game Token, then chances are your pool is going to pump and dump at some point. Avoid phony, unknown tokens within pairs. Again, do your research on which pools have the best pairs for investment longevity.
The most obvious of the three reasons, if the market is going down, chances are your token pairs are losing value and hence your LP token value will shrink. If you're a long-hauler in crypto, then more than likely you wont panic sell to get out of the position. However, make sure you are ready to see your value dip for an extended amount of time. If you can't afford it, you might need to pull your money out and leave the fight for another day.
In the end, DeFi has some amazing opportunities to let your idle tokens/coins to earn some money back by staking or investing into pools. However, make sure you know what you are investing into and if you want short-term or long-term exposure. This will help you back out of your position if crypto days go a bit gray. Happy Investing Everyone!
Written by: nikethereum.eth / Medium / Mirror