Easy LP hedging approach

I'm gonna share a straightforward LP hedge approach. So, here’s the deal with LPs: let’s say I jump into a liquidity pool (LP) with X bitcoins valued at Y USD. If the price goes up, I end up with more USD, but each bitcoin costs more, meaning if I cash out, I’ll have fewer bitcoins than I started with. If the price drops, I’ll have more bitcoins but they’re worth less, so if I convert, I’ll have less USD. Now, if I wanna keep my bitcoin amount instead of focusing on USD (which is usually better in a bull market), here’s what I do: 1. Start an LP position. If the price dips, swap the extra bitcoins for E USD. 2. For the next LP position, take a long on a perpetual contract worth E USD. This acts as my hedge. If the price falls, I might lose some or all of my perp position, but that’s cool since my goal is to keep my bitcoin balance stable. If the price rises, the gains from the perp can help boost my bitcoin stash. The math isn’t perfect, so my bitcoin might go up or down more than I think, but it should work out in my favor. And don’t forget, all the fees get covered from the LP. You can also flip this strategy to protect your USD instead of bitcoin, and it can work with crypto pairs too.

I can see a flaw in your hedging strategy in step 2 that might not pan out as you planned if you abide to it, also because your hedging is more reactive and moves in the direction of the market rather than being neutral and proactive in essence. What a true hedge stands to do by application and deployment, is for protection against wrong decisions about the market movement and direction and that means trying to time the market is a bad decision already mostly with a long contract. Wouldn't it make more sense to you to open the long perp at same time after deployment of the LP with a modest and reasonable leverage, instead of waiting for the price of Bitcoin to fall before you open the long perp?

Yes, that makes sense, but it isn’t simple anymore. The math also depends on the upper price where the LP will be closed. I mean, it’s a good idea, but it’s less flexible and more math-heavy. I open several short price range LPs (one at a time), and when some reach lower level, I hold the same amount of BTC and use the extra USD to long BTC, I guess, in the long the result is the same. It is not guaranteed neutral, at least not deterministically.

Wish I'd thought of this when I was very active! I used to only do LPs in stablecoins and/or shitcoins actually, mainly because I'd keep them in for so long only to lose out when BTC kept going up in price (bad timing). In the end, I only found it useful for stablecoin pairs, then realised I should have kept those in long term. The commissions rarely covered in a bull!