Impermanent loss in crypto: what it is and why
Impermanent loss is the gap between an AMM pool position and holding the tokens. It becomes permanent when you withdraw or close the position.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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You meet the term when you add tokens to a liquidity pool, a shared pot that traders swap against. The pool's value can drift from a simple holding.
How does impermanent loss work?
An automated market maker (AMM) is a pool that prices swaps with a formula. As prices diverge, the pool sells the token that rises and buys the one that falls. Your share ends up holding more of the weaker token.
Do fees and rewards offset it?
Trading fees and rewards can offset the loss in part or in full. They do not promise a profit. If the gap is larger than your earnings, you stay below holding.
When does impermanent loss become permanent?
The name suggests the gap can close. If the price ratio returns before you withdraw, it can shrink or disappear. Once you withdraw, the loss is locked in. Later price moves cannot undo it.
Which crypto activities does it affect?
Impermanent loss applies to AMM liquidity pools. It does not apply to plain staking or lending of one asset. They do not rebalance your holdings against a pool ratio.
Frequently asked questions
Yes. Divergence loss is the technical name for the same gap. Platforms often use the two terms interchangeably.
It can, but the effect is usually small while both stablecoins keep their peg. If one loses its peg, the pool sells the stronger one for the weaker one.
The IRS treats crypto as property. The rules for pool withdrawals can be uncertain, so a withdrawal may be taxable. Ask a tax professional.
