No, because you lose money if the price never comes back. Eth will probably go up. However, you could apply your strategy to the BTC/ETH pair. This is a pair that could keep a steady ratio over long period of times.
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The point of this strategy is to lower volatility not min/max profits. If you provide liquidity to the BTC/ETH pair it doesn't matter if the ratio stays even because we're all measuring value and unit-of-account in terms of USD.
Just be careful with impermanent loss
I must not be understanding impermanent loss correctly.
Haven't I already described it correctly in the original post?
If ETH goes up you only make half the gains.
What's weird is how no one seems to mention Impermanent GAINS.
Where you lose less money when ETH drops. Very odd.
Actually you understand it perfectly. I am the one who didn't understand your strategy. Impermanent gains is a cool concept, hadn't thought of it like that.
I think most people are used to think in terms of portfolios, with percentage allocations to each coin.
I would tend to think: "I decided to hold 10 ETH, so if I provide liquidity with my 10 ETH, I would lose ETH on the way up".
After reading your original post, I admit the ETH/DAI strategy is great. But it is also capital intensive. If you want to make a $5,000 bet on ETH, you must have $10,000 in DAI and $10,000 in ETH, then provide liquidity with it.
So you don't only make half the gains on your ETH, you also make no gains on your DAI, so you actually make 25% on the way up (and 75% less loss on the way down). It is a very conservative strategy.
I personally prefer to fully invest that $20,000, as the rewards are potentially so much higher.
You could argue that you're not willing to invest fully in ETH. You only want to invest $10,000 not $20,000.
But then I would argue that holding the other $10,000 in DAI is also risky. First, because of smart contract risk as an LP, and second because of the DAI peg.
Personally, when my money enters crypto, I consider it invested (even DAI). I can't stomach holding real savings in DAI or USDC. So using your strategy will just remove too much gain potential. But I see where it comes from.
In essence, your strategy is the opposite of leverage/margin trading. With margin trading one increases risk and reward and pays fees. With your strategy one decreases risk and reward and earns fees.
I also noticed something else. If ETH goes up 4X you double your money. So in that case it is half the gains. However, consider the case where ETH goes 4X again, after having already done a 4X.
This now means ETH is up 16X, but you will only make a 4X on your money. So you don't make half the gains in that case, you make 25% of the gains.
In fact, you will always make the square root of the real gains. If Eth goes up 10X you will make approximately 3.16 times your money.
3.16^2 = 10.
When you add this to the fact you need to hold in DAI the USD amount of your ETH. The loss on an ETH 10X is HUGE. So my other comment is wrong, I was assuming you would make half the gains with your ETH.
This also means that for gains less than 4X, you make more than half the money. For example, for a 3X in ETH, you would make 1.73 times your money because 1.73^2 = 3.
Making half the gains would mean 1.5 times your money, but you make more in that case.
So, in short, the bigger the difference in price, the larger the rate of loss becomes for the same change in percentage gains.