Original author: aibra.
Original translation: TechFlow
Imagine a scenario: late at night, you are surfing on X (formerly Twitter) and suddenly see that @aixbt_agent has just released the $CHAOS token. You quickly invest $1,000, when the tokens market value was only $1 million. A few minutes later, the market value soared to $10 million, and you decided to lock in some profits. If you choose to sell all at once, you may suffer losses due to slippage, or even cause unnecessary losses due to insufficient market depth. A more rational way is to plan an exit strategy in advance and realize profits step by step. Here are some suggestions for exit strategies.
Most traders will plan their exit points in advance and sell tokens in small batches when they reach their target profit multiples (such as 2x, 10x, etc.), while retaining a small portion (about 10%) in case the token price continues to rise. This strategy is particularly suitable for use in situations where there is uncertainty about future trends, as it can achieve partial profits (Take Profit, TP) while retaining a certain market exposure.
Recently, I have started using concentrated liquidity (CL) pools to maximize returns while gradually exiting positions. This article will describe some situations where this strategy is more suitable, as well as some of the disadvantages of this approach.
Profit from using centralized liquidity (CL) pools
This method is particularly effective under certain conditions. Tokens suitable for using CL pools usually have the following characteristics:
High trading volume
Low liquidity
High attention: For example, $AIXBT , $Zerebro, $MOG , $BITCOIN and other tokens with high community popularity.
High confidence
Low fee chain
It won’t return to zero in the short term
These features help to earn additional income through commissions while exiting positions.
Next, you need to decide which token to pair it with, and what the fee structure is. Personally, when providing liquidity for a token, I like to pair it with an on-chain Gas token.
Pro tip: If you provide liquidity for the AI Agent tokens that @virtuals_io just bound, it is recommended to pair them with ETH as soon as possible. Such tokens are usually paired with Virtuals tokens in the early stage, and the liquidity of ETH pairing is less, so early participants can get higher returns through transaction fees.
Due to the large volatility of memecoins, it is recommended to choose a 1% fee structure. Lower fees may not be able to offset the impermanent loss (IL) caused by price fluctuations.
Finally, it’s time to set a trading range for our liquidity pool (LP). To understand how to use centralized liquidity (CL), it’s important to understand how LP works under price range constraints. The lower limit of the price range is usually the price at which your LP is 100% converted to memecoin, while the upper limit of the price range is usually the price at which your LP is 100% converted to ETH/SOL.
Lower limit price: Usually a range slightly higher than the market price is selected to avoid additional demand for ETH/SOL and provide unilateral liquidity.
Upper limit price: It is recommended to set it as the ideal upper limit of the target profit range, that is, an acceptable exit price, and you will not feel regretful even if you exit before the price reaches this range.
With the above settings, your target profit range will be within the fee earning range of the CL pool. If the price falls below the lower limit or exceeds the upper limit, you will stop earning fees until the price returns to the range.
Please be sure to be familiar with the operation process of CL, especially when initializing the fund pool, to avoid losses due to setting errors.
Reviewing the pros and cons of providing liquidity for Memecoins
advantage:
Suitable for tokens that you are willing to hold for the long term, especially those with high trading volume, high community attention and in which you have strong confidence in its future development.
There is an opportunity to earn very high Annual Percentage Rates (APRs), especially when markets are volatile and trading is frequent.
It provides a high degree of flexibility and customization, allowing strategies to be adjusted according to individual needs.
When the price hits the upper range limit, you can exit without slippage, thus avoiding additional costs caused by insufficient market depth.
shortcoming:
Continuous attention and active management are required. If liquidity is not removed in time at the target price, the opportunity to lock in profits may be missed.
If the fee income is not enough to offset the impermanent loss (IL), losses may result.
It is not suitable for beginners as it requires a high level of market understanding and operation.
Let’s review the $CHAOS example again
Suppose you invested $1000 to buy $CHAOS at $0.00001 (market cap 1M) and received 100,000,000 tokens. We believe $CHAOS is an ideal candidate for liquidity because it has the following characteristics: AI tokens are currently very popular, with large trading volume, high community attention, and we have high confidence in its future development (this is the first token released by the project). In a short period of time, the token price has risen to $0.0001 (market cap 10M).
We want to set the lower limit at $0.000105, slightly above the current market price, and we think the token can eventually reach a market cap of $30 million or a price of $0.0003. We would also be happy with profits in between. So we set the upper limit at $0.0003.
The ideal situation is that the price fluctuates between 10M and 30M market cap for a period of time, accompanied by high trading volume. In this way, we can continue to make profits through transaction fees. If the market price rises and stabilizes around 20M-25M market cap, you can choose to remove liquidity and add liquidity again in a narrower price range (such as adjusting the floor price to close to 20M market cap).
Note: The above example is a simplified version. In actual operation, you need to convert the USD price into the price of ETH or other paired tokens and make adjustments according to the specific situation.
Personalization strategy and summary
In addition to the above methods, there are many variations and more complex strategies. For example, tokens can be divided into multiple parts to provide liquidity in a narrower price range, thereby further optimizing returns. Each trader can choose the strategy that suits him best according to his goals and risk tolerance.
Finally, I hope this article can provide you with some inspiration. If you have any ideas or suggestions, please leave a comment below!
As I was writing this article, @phtevenstrong happened to release a video where he also coincidentally used $CHAOS as an example.
Thanks for reading, and good luck with your investment!
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