What Happens To LOAN When PLS Pumps (Ratcheting Effect?)

LOAN is still a new token. It wasn’t even around when PulseChain (PLS) reached its current all-time high back in May of last year.

In fact, the majority of LOAN’s lifespan so far has been in the midst of a significantly-lower entry price for PLS. 

But what happens when that changes?

If PLS breaks through its previous price record and starts to make new ones, I think it would be huge for LOAN.

I’m not providing financial advice, but here are three reasons why I think a spike in PLS’s price could make LOAN’s price spike even harder.

1. LOAN’s Fee Earning Structure

When you place LOAN tokens in the Staking Pool, you earn issuance fees and redemption fees.

The issuance fee is collected anytime a user borrows USDL. A portion of these fees is then paid out to LOAN holders who contribute to the Staking Pool. 

When PLS’s price pumps, more and more users could borrow USDL to take profit on this price appreciation. This would then increase the yield for LOAN stakers, making LOAN more attractive to buy.

Meanwhile, the borrowing fee is collected whenever a user redeems USDL for PLS.

When PLS’ price rises, so does the value of the PLS that stakers are receiving as yield. 

As a result, buying LOAN would be a particularly attractive way for PulseChain users to get their hands on an increasingly expensive asset–which could further increase LOAN’s price.

2. Low Liquidity Outperforms High Liquidity

The massive and sudden gains that come from crypto can partially be explained by low liquidity. 

When liquidity is low, large purchases can significantly impact the price of an asset.

For instance, a single $1 million USD buy could drastically alter the price of a coin or token that does not have a lot of liquidity.

At the same time, coins with massive amounts of liquidity like Bitcoin are largely unaffected by massive individual purchases.

This can provide more stability for larger assets, but also lowers the likelihood of everyday holders making a massive amount of money overnight. 

That’s why altcoins outperformed Bitcoin many times over in the crypto bull run of 2021.

As new projects, PLS and LOAN both have relatively low liquidity for now.

The biggest liquidity pool for PLS has roughly $27 million USD.

The biggest liquidity pool for LOAN, on the other hand, has roughly $230,000 USD (which is around 100 times less).

3. How Cryptocurrencies Impact the Prices of Other Assets

PulseChain’s creator is credited with coining Heart’s Law. This crypto principle describes the relationship between the price of different digital assets.

Per Heart’s Law, the price of assets which are bonded together by liquidity pools are likely to be correlated. 

When applied to LOAN, this could have significant implications. After all, LOAN’s biggest liquidity pool is the LOAN:PLS trading pair.

Here, Heart’s Law could mean that a rise in the price of PLS could cause LOAN’s price to rise as well.

This is made even more likely by the fact that arbitrageurs can buy up LOAN to trade it for discounted PLS in the liquidity pool.

There is no way to say for sure how the price of PLS and LOAN will correlate.

But these three factors have left me convinced that a newsworthy spike in PLS’ price could be even bigger news for LOAN.

Still, it’s important to make up your own mind. For more reading, check out The Ultimate Guide to LOAN Token.