Cryptocurrency exit strategy

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9 Mar 2024

106

What exactly is a crypto exit strategy and do I need one?

I guess it is an interesting time to be asking this question as we are headed into a 2024 bull run and right before the bitcoin halving, but planning ahead is often a smart move. Do you have an exit plan or do you prefer to hold?

Well, it's a crucial plan that you make to ensure that you can liquidate your financial holdings in the cryptocurrency market. In other words, it's a strategy to sell off your crypto assets. The main purpose of having an exit strategy is to minimise losses in case of a market collapse or to capitalise on profits.

It's important to have a plan before you buy

Before you even make a purchase, it's important to have a clear plan for selling. Without one, you risk getting trapped in the unpredictable world of cryptocurrencies. One common mistake with exit strategies is keeping them too flexible. This essentially means that you don't have a strategy at all, and you might miss out on potential opportunities to exit the market. Now that we've covered the importance of an exit strategy, let's discuss some commonly used ones.

Why do you need an exit strategy?

Well, holding onto a particular cryptocurrency for too long, driven by greed, can lead to significant losses, even if the price was once significantly higher than your entry point. Let me give you an example. Let's say you decided to buy a cryptocurrency in January, and the price suddenly jumps by 20%. You might be tempted to sell and take your profits. However, if all your friends decide to hold onto the coin, you might feel hesitant and fear missing out on even higher profits if the coin's value continues to rise (also known as FOMO - The Fear of Missing Out). This is where many inexperienced traders make a mistake. They hold onto their investment for longer, hoping for a price recovery. Unfortunately, the value of their investment plummets by 50% within a couple of months, leaving them with a significant loss.

So, what should you do in such a situation? Sell and cut your losses or hold and wait for a potential recovery? The truth is, no one can predict the future, and the currency may never reach its all-time high again. This is why having an exit strategy in the first place could have helped you avoid such difficult decisions. If you had decided to sell your cryptocurrency when the price rose by 20%, you would have made substantial profits. This is why you really must have a solid exit strategy.

Let's take a look at some of the most commonly used exit strategies in the cryptocurrency market

Limit/stop orders

One popular method is using limit/stop orders. These allow you to set a specific price range at which your stocks or crypto assets will automatically be bought or sold. For instance, if you have €100 worth of Bitcoin purchased at €25,000 and you want to limit your losses by selling once the price reaches €20,000, you can set a limit order at that price. Once the price hits your specified target, an order to sell the asset at that price is added to the transaction book. This order remains open until the price limit is reached or until you choose to cancel it. The advantage of limit orders is that they can be executed automatically, even when you're not actively trading. However, it's important to note that during extreme price fluctuations, your order may not be filled in time. Nonetheless, placing limit/stop orders is generally a good practice. To make things even simpler, many exchanges allow you to set up One Cancels the Other (OCO) orders. This is a combination of a stop loss and a take profit order. With an OCO order, you can set specific price points to sell your Bitcoin, such as €20,000 and €30,000. If one condition is met, the other order automatically expires. This ensures that you can secure profits and potentially limit losses.

Having a well-thought-out exit strategy is essential when dealing with cryptocurrencies. It helps you minimize losses and capitalize on profits. Using techniques like limit/stop orders or OCO orders can provide you with a systematic approach to selling your assets. Remember, the cryptocurrency market is highly volatile, and having a clear plan for exiting can make all the difference in your investment journey.

Setting Price Targets

A Strategic Approach to Cryptocurrency Investments Before delving into the world of cryptocurrencies, it is crucial to establish your investment goals and determine whether you are in it for the long haul or short-term gains. Understanding the purpose behind your investment decisions will streamline the decision-making process. Once you have a clear investment objective, it's wise to set price targets for your cryptocurrencies. These targets act as safeguards, protecting you from significant losses.

Let's take Bitcoin as an example. Suppose you believe that Bitcoin has the potential to reach €100,000. Even in such a scenario, it is still prudent to set earlier price targets. Depending on your goals, you can sell a portion of your holdings at €80,000 and €90,000. This strategy ensures that you secure a substantial profit and allows you to reinvest if the price experiences a sudden and drastic drop.

The Step-by-Step Method

A Dollar-Cost-Averaging Approach Developing a well-defined plan before investing is crucial. Consider the level of return that would make you content. Are you satisfied with a 20% increase in price, or do you aim for a minimum of 200% profit before selling?

The Step-by-Step Method, also known as Dollar Cost Averaging (DCA), is an investment tactic that involves spreading your budget and making periodic purchases at predetermined intervals. This approach eliminates the need to constantly monitor the volatile nature of the cryptocurrency market. For instance, you can invest a fixed amount from your salary every month, allowing you to buy at both high and low points. This method ensures that you achieve an average purchase price, hence the name. Additionally, the Step-by-Step Method enables you to sell a predetermined percentage of your assets at specific price points, preventing you from becoming too greedy or selling too late. While there is no foolproof strategy for guaranteed success, this approach allows you to take profits periodically while still maintaining a long-term investment.

HODL: The Strategy of Long-Term Holding HODL

HODL an abbreviation for "Hold On for Dear Life," refers to a strategy that involves holding onto a cryptocurrency for an extended period. Instead of constantly monitoring price fluctuations, HODLers anticipate significant value appreciation over several years. This investment approach offers a relaxed and patient perspective. However, it is not recommended for smaller, less stable cryptocurrencies that carry higher risks. Reserve this strategy for established coins or altcoins in which you are willing to bear potential losses.

Understanding bull and bear markets

Understanding Bull and Bear Markets Similar to traditional financial markets, the cryptocurrency market experiences cycles consisting of bull and bear phases. In a bull market, most cryptocurrencies witness exponential price increases, often reaching thousands of percentage points within a few months. Conversely, the bear market is characterized by significant price declines, sometimes resulting in more than a 99% depreciation. Timing the beginning or end of a cycle is challenging, and while historical patterns can provide insights, there is no guarantee that the current cycle aligns with previous ones. It is crucial to be aware of market volatility and embrace both small and large market dips when investing based on cycles.

Diversification

Spreading Your Investments One common mistake among investors is putting all their eggs in one basket. While this may not be detrimental if the chosen project skyrockets, it can lead to substantial losses if the cryptocurrency collapses or disappears. Diversifying your investments across multiple projects can yield better long-term results. A typical portfolio management approach involves allocating funds to Bitcoin, Ethereum, large-cap cryptocurrencies, small-cap cryptocurrencies, and promising yet lesser-known coins. The distribution should be proportionate to the associated risks.

For example, allocating a significant portion of your investment to established coins like Bitcoin and Ethereum ensures stability. Conversely, be cautious when investing heavily in low-value coins, as this may overshadow potential gains in other areas. Selling or redistributing funds from underperforming projects to those with better prospects can enhance returns.

Stable coins

Generating Passive Income After securing profits from your investments, you may consider converting your cryptocurrencies into stable coins. Stable coins maintain a fixed value, usually pegged to a fiat currency like the euro or dollar. This stability shields your investment from sudden price fluctuations. Similar to keeping funds in a bank, stable coins can generate interest over time. Some platforms offer interest rates of up to 6% per year. Unlike traditional banking, you do not have to pay taxes on these earnings. However, it is essential to assess the risks associated with each platform, including the potential vulnerability to hacking.

In conclusion

Thorough research is essential before entering the cryptocurrency market. While it can be highly volatile and involve financial risks, employing strategic approaches such as setting price targets, dollar-cost averaging, diversification, and utilising stable coins can minimise potential losses and maximise returns. Remember, invest only what you can afford to lose and always conduct your due diligence.