Crypto liquidity providers can be profitable when considering trading volume, volatility and other factors, the data firm says

Good morning Here’s what happens:

Prices: Ether Holds Nearly $1.9K Ahead of Shanghai Upgrade; Bitcoin hovers near $28,000

Lessons learned: Becoming a successful crypto liquidity provider requires an active approach that takes trading volume, volatility, and other factors into account.

Ether is falling, but better than Bitcoin

Ether fell Thursday but continued this week’s trend of outperforming Bitcoin.

The second-largest cryptocurrency recently traded a few dollars below the $1,900 it hit on Wednesday, down 1% over the past 24 hours but up more than 5% since the start of the week, when it lingered below $1,800.

Investors seem increasingly excited about the Shanghai hard fork, which is set to take place on April 12th. The upgrade, also called Shapella, will mark Ethereum’s full transition to a Proof-of-Stake (PoS) network and enable tiered 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 trading staked Ether,” Victoria Bills, Chief investment strategist at financial services firm Banrion Capital Management, CoinDesk TV’s first mover program said. “And one thing we can probably expect from that is an increase in activity across the chain when it comes to Ethereum.”

Certainly, some Ether watchers are saying that the forthcoming unlocking of ETH deposited on the network to increase security against rewards will prompt an onslaught of token liquidations. However, others claim that the event could prove optimistic for Ether as staking and capturing earnings directly from the blockchain becomes more accessible.

“This is an amazing opportunity for Ether and has shown up high even for the year to date,” said Bills. “As it becomes more liquid and accessible, we’re likely to see a lot more of this asset traded.”

Bitcoin recently fell below $28,000, down about 2.2% after spending much of the day above this level, as it has for most of the past three weeks. The largest cryptocurrency by market cap has held steady as investors ponder multiple signs of economic contraction and possible aftershocks from the recent banking crisis.

Other major cryptos have been in the red recently, albeit slightly shaded, though popular memecoin DOGE, a big gainer after Twitter replaced its blue bird on its homepage with the crypto’s Shiba Inu dog logo, is down more than 4.5% % collapsed.

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

Banrion’s Bills noted that Bitcoin’s price has stabilized as the banking turmoil has eased. “Bitcoin had a soar through the ceiling when we had a lot of turmoil and then we see it bounce back to a more stable state around 28,000,” she said.

The keys to becoming a successful crypto liquidity provider

A new research report that crypto data company Amberdata shared with CoinDesk suggests that providing token liquidity for 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 of dollars being provided by users for smart contracts.

But becoming a successful liquidity provider isn’t as simple as passively depositing assets into a pool and waiting to turn a profit. LPs must deal with dreaded temporary losses, smart contract risks and exploits.

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

The analysis compared the Dai (DAI) and Ether (ETH) to the Ether (ETH) and USD Coin (USDC) pools, both of which involve trading ETH against a stablecoin. It also compared the DAI and USDC liquidity pair to a DAI and Tether (USDT) pair, where different stablecoins are traded against each other.

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

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

Demand for a particular stablecoin as a trading pair can affect liquidity and trading volume in a pool, thereby impacting capital efficiency and profitability.

In addition, investor sentiment towards a particular stablecoin, such as confidence in its stability or market performance, can also affect liquidity and trading volume.

For traders interested in providing liquidity, Amberdata opines that the factors to consider are the total locked value (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 can be a profitable strategy for those looking for a safer way to hold crypto assets,” Amberdata analysts said. “LP strategies perform well in choppy market conditions and are not significantly different from holding assets in uptrends and downtrends.”

“First mover” dove into crypto markets ahead of Shapella, a portmanteau of Shanghai and Capella, two major Ethereum network upgrades expected to happen simultaneously on April 12. Victoria Bills, Banrion Capital Management Chief Investment Strategist, joined the conversation. Ronit Ghose, Future of Finance Global Head at Citi, explained why the potential of blockchain is measured in billions of users and trillions of dollars in value. Also, Nicolas Bertrand, CEO of Komainu, spoke about the Nomura, Ledger and CoinShares joint venture for cryptocurrency custody.

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