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Impermanent loss in cryptocurrency

Author

Listed:
  • Chu, Gang
  • Dowling, Michael
  • Li, Xiao

Abstract

Impermanent loss risk is a unique risk related to liquidity provision to cryptocurrency exchange pools in Decentralized Finance (DeFi) protocols. To better understand the characteristics of this emergent risk, we first identify the determinants of impermanent loss risk across 1,715 liquidity pools traded on the two largest exchanges. We then explore how impermanent loss is priced in the cross-section of cryptocurrency liquidity pool expected returns. Through a series of portfolio analyses, we document a significantly positive cross-sectional relationship between impermanent loss risk and expected returns. Drawing on a liquidity-based hypothesis, we further demonstrate how the presence of impermanent loss risk impedes liquidity provision and accelerates liquidity demand. Collectively, our results provide strong evidence supporting the important role of impermanent loss risk in determining cryptocurrency liquidity pool returns.

Suggested Citation

  • Chu, Gang & Dowling, Michael & Li, Xiao, 2026. "Impermanent loss in cryptocurrency," Journal of International Money and Finance, Elsevier, vol. 160(C).
    • Handle: RePEc:eee:jimfin:v:160:y:2026:i:c:s0261560625002116
    DOI: 10.1016/j.jimonfin.2025.103476
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    References listed on IDEAS

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G40 - Financial Economics - - Behavioral Finance - - - General

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