Hey DEFI TIMES community,
We are in a raging bull market. Just 11 months ago, we had the worst crash since the 2008 crisis. One year afterward, new crypto millionaires are born.
It feels like 2017 again. Altcoins are going parabolic, while Bitcoin is hitting an all-time high after the other. It’s all fun and games until you realize that the crypto market moves in cycles, and every cycle has to come to an end at some point.
We are far from entering another bear market. However, now is the perfect time to plan your exit out of the crypto market.
If you have been through the 2017 cycle, you probably know how painful it is to lose all your gains within a couple of months.
I was at that point three years ago. You shouldn’t be there in the first place.
Today, I give you my profit-taking strategy. Let’s go!
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Take profits on the way up and down
Remember that you won’t time the top of the bull cycle. In retrospect, the top seems very clear. However, if you have been through 2017, you know how hard timing the market is.
Don’t assume that you will perfectly sell the top. Only beginners make such mistakes!
You should rather develop a strategy from which you profit - despite all the uncertainties. Plainly speaking: take profits on the way up and down.
Take profits during the bull cycle. After a significant market move, take out 10% or 20% of your portfolio. A few weeks later, do the same! Remember: if you take out 10% of your portfolio, you still have 90% in the game, making little difference.
Now, when the market enters a bearish trend, do the same! The chances are that the bull market is over, and you don’t want to hold your bags through a bear market. Take out another portion of your portfolio!
Decision-making is not black or white: It’s grey! Don’t sell everything at once - instead, fractions of your portfolio over several months. Just as dollar-cost-average in, you also want to dollar-cost-average out! Ideally, you do it on the way up and down.
The crypto markets move in two cycles:
During a Bitcoin season, altcoins severely underperform Bitcoin; it’s the other way around during an altcoin season.
It would help if you designed your portfolio to profit from these cycles. That’s why you should continuously identify which season we are in and allocate your funds accordingly.
Right now, we experience an altcoin season - despite this week’s flash crash. There’s a good chance that your altcoin portfolio has significantly outperformed your Bitcoin position during the last couple of weeks. If that happens, consider de-risking your portfolio.
Part of your exit strategy is to rebalance your positions within the crypto market. Say you want to keep 80% of your crypto portfolio in Bitcoin; However, your position shrinks to 50% during an altcoin cycle.
Reallocate some altcoin gains back to Bitcoin to increase your Bitcoin position back to 80%. This strategy can save you much money when the altcoin season finally ends. Even in a bull market, many altcoins decrease by 40-60%. Constantly rebalancing your portfolio prevents extreme losses, and you can finally sleep well at night again =)
Consider taxes as part of your exit strategy. In most countries, rebalancing your portfolio is a taxable event. For example, you made $100,000 in profit with an altcoin trade. You reallocate it to Bitcoin again, which makes you liable to pay taxes on those $100,000.
Every time you trade cryptocurrencies, take out taxes afterward. In the example above, you could take $30,000 off the table, assuming that you must pay this amount of taxes in your country.
If you don’t take out taxes, your crypto positions get overly leveraged at some point. You invest money that you owe to the state.
No one knows how long the bull market will last. A 2018-like crash could occur at any time. In such a worst-case scenario, you don’t want to lose the money you don’t own in the first place.
I always make sure that my taxes are off the table. I convert them either in FIAT or in stablecoins. Note that stablecoins also bear counterparty risk! So, it might not be optimal to store your taxes using stablecoin for a long period.
If you want to read useful crypto tax strategies, check out our previous article about dealing with crypto taxes.
Listen to market sentiment
The most important part of your exit strategy should be to evaluate carefully whether we have reached the cycle peak. As I have mentioned before, you will not time the top.
However, you can certainly define your own top signals and sell significant portions of your portfolio when they appear. Of course, I cannot give you financial advice, and you should always stick to your own plans, but I will give you my personal top signals in 2021.
I only made 5x this month
If you want to feel the 2017 market sentiment, this heading describes it pretty well. The altcoin and ICO mania went too far. Many people were screaming for more and more profits. While others made 20x in their portfolio, some people only made 5x.
That’s why they complained about their “underperforming” altcoins. Even though they turned $10,000 into $50,000, they were not satisfied.
This scenario is my ultimate top signal because it’s not sustainable. But rest assured, we are far away from that. We got a glimpse during DeFi summer 2020, and we all know how it ended.
If you think we have reached such a point, consider selling bigger portions of your portfolio, especially your altcoin portfolio.
Mainstream media companies talk about the potential of Uniswap
I expect the DeFi narrative to get into the global discussion in 2021. Just as ICOs dominated crypto discussions in 2017, DeFi will drive this bull market. It’s only a matter of time until the outside world will learn about Decentralized Finance.
Right now, we are far away; In the United States, people are searching a lot less for “DeFi” than they did for “ICO” in 2017. There is still enough room to improve.
I expect this chart to change drastically. People will start researching more and more to find out what DeFi is and how they can invest in DeFi related projects.
The point when big media companies will start frequently reporting about Uniswap and major DeFi protocols is when I get cautious.
Uniswap trades cost $10,000
Millions of people will use DeFi protocols in 2021. That’s why Ethereum gas fees will certainly not go down; I expect them to increase drastically!
During a bubble scenario, I can imagine gas prices hitting thousands of dollars for one single Uniswap trade. This is unsustainable. So there might be only a small time frame where people are greedy enough to pay $10,000 for a Uniswap trade to catch another small altcoin gem.
Prepare for this scenario! For example, you can deposit ERC20 tokens on a second-layer solution (Rollups → Loopring or Diversifi) in order to pay minimum fees when you want to swap them during the cycle’s peak.
You can also think about storing your coins on a centralized exchange. I know, that’s not why we are in DeFi, but it could save you thousands of dollars.
There are also downsides with centralized exchanges: Coinbase goes down very frequently, and you might not be able to sell your coins when you have to. They are also at risk of hacks.
Therefore, it might be a good idea to diversify your crypto holdings into centralized exchanges, second-layer solutions, and regular wallets.
As you can see, a crucial part of your exit strategy is to manage risk - not only to convert crypto to FIAT but also to consider taxes, quality of the projects, and rebalancing your portfolio.
Please don’t be sure that you will time this cycle’s top because you won’t. A good investor always considers himself to be wrong in the first place.
So, make sure to position yourself in such a way that you profit in every single scenario.
1. Consider taxes when you swap tokens
2. Rebalance your positions when your portfolio bears too much risk
3. Listen to the market sentiment. Are people too greedy? What does the world think about DeFi? Are big media companies reporting about Uniswap and co? What does a Uniswap trade cost?
Define your own strategy and exit signals, including writing down price targets that you act upon!
Remember to stick to your price target, no matter what happens, and never increase it drastically during the bull run.
Exit the market when the time has come. You don’t want to go through 2018 again.
All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.