How to Calculate Impermanent Loss

What if holding two tokens in your wallet quietly beat putting them to work in a liquidity pool? That gap is called impermanent loss, and it can reach about 5.7% after just a 2x price move. Impermanent loss is the difference between the value of tokens you simply hold and the value of the same tokens after you deposit them in an automated market maker pool and the prices move apart. This guide shows what it is, why it happens, and how to calculate it with a clear formula.

What Impermanent Loss Really Means

Impermanent loss is not a fee and not a hack. It is an opportunity cost that liquidity providers face in decentralized finance.

When you add two tokens to an automated market maker (AMM) pool, you help others trade between them. In return you earn a share of trading fees. But if the two token prices move apart, your deposit can end up worth less than if you had just held the tokens in your wallet.

That gap, between holding and providing liquidity, is the impermanent loss. It is called “impermanent” because it only becomes real when you withdraw. If prices drift back to where you started, the loss can shrink or vanish. To learn more about these pools, see Ethereum.org on decentralized finance.

Why Impermanent Loss Happens

The cause is the math that most AMM pools use: the constant-product formula. A pool keeps the product of its two token amounts roughly constant, written as x * y = k.

When one token’s market price rises, traders buy it from the pool until the pool price matches the market. That trading drains the rising token and adds the falling one. So the pool automatically sells your winner and buys your loser.

The result is simple to state. After prices move, you hold more of the cheaper token and less of the pricier one than if you had done nothing. The bigger the price gap, the bigger the loss.

How to Calculate Impermanent Loss Step by Step

You can calculate impermanent loss two ways. The first compares values directly. The second uses a short formula.

Here is the direct method in plain steps:

1. Note your starting deposit and token prices.
2. Work out the hold value: what your tokens would be worth if you never deposited them.
3. Work out the pool value: what your share of the pool is worth after rebalancing.
4. Subtract the pool value from the hold value, then divide by the hold value.

Say you deposit 1 ETH and 2,000 USDC when ETH is $2,000. Your pool starts at $4,000. Now ETH doubles to $4,000.

If you had just held, you would own 1 ETH ($4,000) plus 2,000 USDC, which is $6,000. But the pool rebalanced to 0.71 ETH and 2,828 USDC, worth about $5,657. The gap is $343, or about 5.7%.

The formula gives the same answer fast: IL = 2 * sqrt(k) / (1 + k) – 1, where k is the price ratio change. For a 2x move, k = 2, so IL = 2 * sqrt(2) / 3 – 1, which is about -5.7%.

To put real dollar values on the hold side of that comparison, a general tool like our Crypto Profit Calculator can help, then you subtract your pool value by hand.

Impermanent Loss at a Glance

The loss follows a fixed pattern based only on how far prices diverge. These reference points are well known in DeFi and worth memorizing.

Notice the loss grows, but it grows more slowly than the price gap. A price that moves 5x does not create a 5x larger loss. The chart below shows this curve flattening as divergence rises.

How Trading Fees Can Offset the Loss

Impermanent loss is only one side of the ledger. As a liquidity provider, you also earn a cut of every trade that flows through the pool.

If a pool is busy, those fees can add up to more than the impermanent loss over time. That is how many providers still come out ahead even when prices move.

The key factors are simple:

• Higher trading volume means more fees for you.
• Smaller price swings mean less impermanent loss.
• Stable pairs, like two stablecoins, tend to have tiny losses.

So the real question is whether fees plus any rewards beat the loss. There is no guarantee they will, and outcomes vary by pool and market.

When the Loss Becomes Permanent

The word “impermanent” is a promise, not a guarantee. The loss stays on paper as long as you keep your tokens in the pool.

If prices return to your starting ratio, the gap closes and the loss disappears. But if you withdraw while prices are still diverged, the loss locks in and becomes real.

This is the single most important habit to build. Before you exit a pool, compare your position against simply holding, and factor in the fees you earned along the way.

How It Differs From Other Crypto Math

Impermanent loss is its own idea, separate from other crypto calculations. It helps to know where the lines sit.

It is not the same as basic trading gain or loss. For buying and selling math, see our guide on how to calculate crypto profit and loss.

It is also not staking. Staking locks one token to help secure a network and earns rewards, with no rebalancing and no impermanent loss. Providing liquidity uses two tokens and carries this risk. Learn the difference in our guide on how staking rewards are calculated.

Frequently Asked Questions About Impermanent Loss

Sources

This article is for general education only, not financial or investment advice. Crypto is volatile and risky, and prices, fees, rewards, and tax rules change fast and vary by country, so do your own research and consult a professional. Reviewed for accuracy by Prof. Dr. Khalil Mudassar, PhD. Last updated September 12, 2026.