Developing a robust exit strategy is crucial to successful investing. Buying the bottom and selling the top is simply not realistic, even the most experienced traders in the world can't get that perfect timing.
However, buying the dip and selling when you've made sufficient profit is more practical. What constitutes 'sufficient profit' will be different for everyone and dictated largely by factors such as the amount you're initially investing, time in the market and your personal finance goals.
Your projects' tokenomics
Deciding when to sell your crypto is largely linked to your reason for buying it in the first place. This should be down to the project's utility and what value it's bringing to the market.
Tokenomics is a big part of this. So understanding the tokenomics of your cryptocurrency will influence when you sell. Token economics includes important factors such as:
The token’s ultimate use and value
The token’s production and distribution
Supply and demand
Token burn schedules
Incentive mechanisms for participants throughout it's ecosystem.
It's also imperative to review your crypto's token allocation and get an idea of how decentralized (or not) it is, who owns the coins, and how many they own.
Do the founders and key developers hold a large percentage of the available coins? Was there a pre-sale with early investors and venture capitalists snapping up huge chunks of tokens? Was there a fair launch, pre-mine or ICO?
If so, they might sell as soon as the value pumps, which could then plummet the price and decimate all your gains before you get a chance to cash out.
“In the short run supply and demand alone determine market prices." ~ Seth Klarman
Make sure you know the origins and economics of every coin in your portfolio. Then you can plan an exit strategy unique to each project.
In order to develop an effective exit strategy (as well as general trading), you'll need to learn about market cycles, both the psychology and the timing. The 4-year market cycle is the most common, typically consisting of a 2-3 year bull market and a 1-2 year bear market.
However, within this there will be multiple, smaller market cycles that can last several weeks and months.
Top tip: The crypto bull market is often instigated by the Bitcoin halving. The Bitcoin halving is when the reward for mining Bitcoin is cut in half.
This halving takes place every four years, with the next one scheduled for Spring 2024. The halving policy was written into Bitcoin's mining algorithm to counteract inflation by maintaining its scarcity.
It's worth noting that because Bitcoin is the market leader, most altcoins experience an upswing when Bitcoin's price rises. But be aware that if Bitcoin's price skyrockets quickly, altcoins can drop because both retail and institutional investors rush to buy Bitcoin which leaves the lower cap gems behind.
Gas fees and transaction times
When planning your exit strategy, ensure you have enough coins set aside to pay gas fees. These can add up and eat away at your gains. For example, Ethereum has some of the highest gas fees on the market.
Do dry runs with small amounts first. This helps familiarise yourself with the process, the cost, and the time it takes. Transferring crypto between wallets and exchanges is notoriously fiddly and laborious, so getting used to the details, the interfaces and the user experience will mean it's easier, quicker and less stressful when you are ready to take some profit.
Top tip: Store your gains in soft and hard wallets native to your crypto if possible. This is a good way to make sure your gas fees and transaction times are minimal.
Have multiple banking options
This is often overlooked but could save you significant money in the bull market. Having a range of on and off-ramp options is crucial to a successful exit strategy.
Open accounts on multiple trustworthy exchanges incase one goes down, which is frustratingly common especially in peak times such as the peak of a bull market.
Top tip: It's also worth opening multiple bank accounts for cashing out and transferring your gains into fiat. This is incase one of your bank accounts gets frozen when all those juicy gains and altcoin money hits it.
This point is closely connected to market cycles. There are a range of technical indicators that can help establish when you should exit the market, however the list is too long for one article so we're going to focus on two key ones.
Altcoin vs Bitcoin value comparison
Bitcoin dominance is how much of a crypto's total market cap is accounted for by Bitcoin. As more altcoins pour into the market, Bitcoin's dominance declines. This is significant because as Bitcoin dominance declines, money moves into altcoins and this is why so many alts saw new all time highs in the last bull run.
Historically, large drops in Bitcoin dominance lasts approximately one-to-two weeks, which gives you enough time to exit when your favourite altcoin investment pumps as a result.
Study your altcoins' value against Bitcoin's value. Depending on your country of residence, most investors gauge the value of their crypto against the US dollar (USD) or British Pound (GBP).
But tracking the value of each cryptocurrency in your portfolio against Bitcoin's value, gives you the best indication of whether your cryptocurrency is rising in value against other assets in the crypto space.
Keeping an eye on Bitcoin dominance alongside how your altcoin is trending against Bitcoin will hep you figure out when is the optimum time to cash out.
Don't get high on hopium
Developing a realistic strategy can make or break your success in crypto investing. Everyone wants to see their portfolio do 100x and although this is possible, it's unlikely.
Pick a figure you'd be happy to cash out at and stick to it. As mentioned in the intro, this figure depends on your own unique financial position, your ultimate goals in life and whether you believe in cryptocurrency as a legitimate store of value and system of payment, or if you just want to be another crypto millionaire.
Getting swept up in the excitement of a rally and especially a full blown bull run, means it's easy to get greedy. Sticking to that number you chose is the best way to secure gains and take profit.
Entering and exiting financial markets always comes with risk. The crypto market is especially volatile so never invest more than you can afford to lose. And if you're in real doubt, seek the guidance of a qualified financial advisor.
~ Zac Colbert, The Crypto Journo
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