ETH vs ETH/USDC ILM — Which is better for you?
Backtesting ETH’s Performance vs the ETH/USDC 3x ILM highlights and compares price performance between the two. Whether you choose to hold ETH or deposit ETH into the ETH/USDC 3x ILM, it is important to know the various options that exist in the market. With leverage present in the ETH/USDC 3x ILM, both gaines and losses are magnified during periods of volatility.
Introduction
Cryptocurrency markets are notorious for their unpredictable nature. They are very much governed by volatility. As a consequence multiple tools have been launched to capitalize on their volatile nature.
A question which is forever present in the mind of the crypto investor is what to hold? Which strategies to use? What is the opportunity cost of using certain strategies versus just holding?
It is vital for any crypto investor to be able to compare their choices so that they can make informed decisions. A lot of strategies are advanced for the average investor — check out this Seamless blog post comparing strategies across their pros and cons.
One strategy for ETH holders to consider are Seamless’s Integrated Liquidity Markets — ILMs.
ILMs are vault strategies that run on auto-pilot, and use ERC20 tokens to represent shares. ILMs make it easy for users to increase exposure by abstracting away time consuming transactions. The desired exposure is achieved by borrowing against a deposited asset. To read more on ILMs, check this article.
In the following paragraphs the performance of a 3x ETH-USDC ILM will be compared to holding ETH, which serves as the underlying asset of that ILM.
Qualitative comparison
The key benefits of holding ETH is that there are no fees, and it is extremely simple — just buy the asset. The upside is just the price movement, as is the downside — this is a hard limit on profit BUT ALSO losses.
On the other hand, ILMs have a higher risk/reward tradeoff due to their increased exposure. This means that the profits may be far greater, BUT ALSO the losses may be amplified as well. ILMs are also automated in comparison to a lot of the other tools out there — a simple deposit is all that is needed, and the ILM maintains the targeted exposure automatically through rebalancing. Learn more about rebalancing here in this blog post.
How do ILMs work?
The ILM’s goal is to increase the exposure to the asset by a multiple. In the case of the 3x ETH-USDC ILM, the ILM will increase the exposure to ETH price movements by borrowing USDC. This means that the ILM in question will:
- Receives a user’s ETH deposit
- Borrows USDC against ETH
- Exchanges borrowed USDC for more ETH
- Repeats until a 3x leverage ratio is maintained
The ILM repeats the loop above until it reaches the desired exposure. In this way, even though the initial amount entered is only, say, 1 ETH, due to the exposure the ILM creates, the single ETH token is liable to the price movements of 3 ETH tokens.
The 3x ETH-USDC strategy is called a `long` strategy because it will be profitable on an upwards movement of the ETH price.
The 3x exposure of the 3x ETH-USCD ILM means that if the price of ETH moves up by $100, then the ILM position of 1 ETH moves up by $300, due to the overall exposure.
Comparison
When comparing over a bull run, it is clear that the ILM outperforms just holding ETH — and by quite a lot.
Let’s take a specific example comparing what would happen if someone just held 1 ETH versus deposited 1 ETH in the 3x ETH-USDC ILM, over the period of Aug 2023 — May 2024.
The following graph shows the value of a position in the 3x ETH-USDC ILM which started off as 1 ETH versus the value of 1 ETH itself:
As seen from the graph, the ILM magnifies the price movements of ETH greatly. It can be seen that during the bull period of Jan 2024 — Apr 2024 the value of a position starting off as a single ETH in the first months at $1,800 had reached $10,200 of value.
These movements are indicative of the nature of the ILMs and hint at how an investor should consider using them; depending on whether an investor’s conviction is that ETH will appreciate, or depreciate, an investor should consider ILMs. *Note there are both long and short ILMs available on the Seamless App.
It is worth noting that the ‘3x’ on the ILM illustrated above is a factor increase on the volatility of the ETH token, which in itself is already volatile. This may not satisfy the risk appetite for some investors. Each ILM strategy has its own targeted leverage ratio, so for the more risk averse individual, 1.5x ILMs may be a more attractive option.
Conclusion
The 3x ETH-USDC ILM amplifies the gains of a bull market significantly; by bringing together zero added protocol fees, automation, and a liquidation-less approach to leverage, ILMs ensure simplicity, efficiency, and passive leverage for any investor.
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