So it’s now the first of November and I’ve pulled nearly all of my funds out of Liquidity provision. I started providing liquidity provision in Juli on Nupool, first only having the bot run on 1 exchange and later on both exchanges. In September I also deposited liquidity into Nulagoon in pool D.
Reason for writing this is, that I feel there is a misconception that liquidity provision in the NBT/BTC pair is an overall profitable enterprise for the providers of liquidity. Of course my experiences are subjective and maybe some other liquidity providers have been making a profit although I can’t imagine anyone providing liquidity in the BTC/NBT pair making a profit outside of the profit gained from a rising BTC price.
I’ll start with Nupool, while the monthly interest rate of 9% (now reduced to 7.2%) seems very profitable the costs of hedging and the exchanges fees chip away pretty much all of the interest earned. Poloniex has a 0.2% fee over every trade and Bittrex charges 0.25% for every trade. Hedging which happens at nearly every price movement (and BTC is always moving) means you’re losing money no matter whether BTC is moving up or down.
After 4 months of providing liquidity on Nupool I lost about 5.5% of the BTC I put in even though I was putting in the interest fee I earned back into the bot on a daily basis and actively moved around funds to the exchange which had the highest interest rate. So after 4 months of providing a liquidity service and being exposed to exchange default risk my net result was a 5.5% loss of funds.
In September I thought I’d try out Nulagoon especially since I was expecting a rise of BTC price thus being in pool D which is the leveraged pool that is exposed to BTC price (aka price go up profit goes up, price goes down net result will be negative) I figured that would be a nice way of profiting both from BTC price increase on top of interest paid for providing liquidity provision.
Contrary to my expectations even pool D on Nulagoon resulted in a loss of funds. While my net asset increased the net result was again a loss in BTC, so even though I was profiting from a leveraged pool and BTC price increased with interest on top of that apparently the internal operation of liquidity provision is so expensive that this still resulted in a loss of funds. To demonstrate one can take a look at the NAV report.
At 2015-09-10 the NAV of pool D was 1.24688 with a BTC price of 238.213.
At 2015-10-29 the NAV of pool D was 1.5254 with a BTC price of 306.415
This means the NAV went up 0.27852 which amounts to a 22.34% increase. In the same period BTC price went up 68.202 which amounts to a 28.63% increase. Aka by being in the leveraged liquidity pool that profits from BTC going up and earned interest your net result is a loss of 6.29%.
Now the reason for me writing this is twofold. First I think we should be honest to liquidity providers and I feel that we are not. At the Nupool website it says: “B) CHANCES
By using said software connecting to the “NuPool” operation, your highest possible return will be 7.2% for 30 days.”
On Nulagoon it says: “Why to invest?
By investing into the Nu Lagoon, you are providing liquidity support for Nubits, which is crucial for Nu. In addition, your fund will be expected to have very considerable compensation. Pool A: 7.2% monthly expected return; Pool C: 20% annual expected return immune to BTC volatility; Pool D: 13% monthly expected return. The actual return could be less or more than expected because of the volatility of BTC price against USD(not Pool C) and other factors.”
Stating this while in reality even in the scenario of BTC going up (which is probably the most favorable scenario par 0 BTC movement and 0 volume on the NBT/BTC pair) people providing liquidity on the BTC/NBT pair with BTC are most likely going to lose funds. We should be honest that at the current interest rates people providing liquidity are going to go break even at best. Providing liquidity for the NBT/BTC pair is not a profitable enterprise.
Second we should start discussing the service we as Nu shareholders provide with supporting the NBT/BTC pairs in the light of its actual cost. I have the feeling most shareholders underestimate the costs. And I can only imagine that with time more liquidity providers realize they are losing funds and thus will pull their funds leaving us in a situation where the peg will be endangered.