If there’s one thing that’s apparent about the online communities surrounding cryptocurrencies, it’s that they tend to be overwhelmingly positive. Every community for each cryptocurrency seems to be sure that theirs is “the one.” Their cryptocurrency is going to blow up and make investors millions; but is that the case? In some situations, yes, but in (many) others, no. The crypto world still has a tremendous amount of room for growth, but that doesn’t mean investors can afford to get lazy with their strategies. Let’s take a look at profit taking and why it’s important now more than ever in the ever-changing and volatile world of cryptocurrencies.
The first question to tackle is “why?” Why would you want to pull out some of your investment when your assets are performing well? Many of us have been there, especially during December of 2017. It seemed like no matter what cryptocurrency you purchased, you were likely to see 10%-20% gains in a matter of days. However, that doesn’t last. One of the biggest mistakes traders and medium-term investors make is letting their profits run for too long.
We often wish to just let our winners “run,” meaning that we don’t take any money out of the asset and just see how high it’ll climb before we cash out. The problem here is that charts aren’t exponential (and certainly not indefinitely), especially depending on the price and position you got in at. The longer you let your winners “run,” the more risk you’re accepting.
Example: Looking at our year chart for Tron (TRX), the markets saw a massive pump in price in December only to see a staggering fall after the beginning of 2018. If we purchased TRX in October of 2017 and decided to “HODL” all the way until now, we’d be sitting with much smaller return on investment (ROI), or even a loss if we purchased in the mid-December jump.
When investing in the cryptocurrency space, there are two different types of “gains” involved.
1. Paper Gains: These are the profits, or “gains,” that investors see on paper. When monitoring your portfolio via Delta, Blockfolio, or any other software, these are the increases in value investors see. If they were to liquidate their entire portfolio right then and there, that’s the approximate value of all assets.
2. Realized Gains: These are a little different. Unlike the paper gains, realized gains (or “real gains”) are the profit investors have successfully taken from the markets and pocketed. Ultimately, realized gains are what investors are looking for.
By taking profits slowly as your assets increase in value, investors are effectively converting their paper gains into realized gains, all while still keeping a portfolio invested.
Instead of joining the “#HODLgang” indefinitely, investors can play this game much smarter by managing risk and taking profits when appropriate without pulling out everything they’ve invested. Investors need to focus on measured, calculated moves, not drastic emotional ones.
In order to balance both risk and potential return, profit taking can be done slowly and gradually. Rather than selling 100% of an asset you own, consider selling off small portions as the price continues to rise to protect the paper gains you’ve made and convert them into realized gains.
Remember: Nobody has lost money taking profits—nobody.
You may be thinking you “lost money” by missing out on some potential profits, but no one is able to guess the top with complete accuracy and it’s just not a realistic goal to have. A much smarter approach is to accept that fact, and proceed accordingly.
There are many different profit taking strategies out there, so ultimately you’ll need to find the one that fits with your overall investment strategy best. However, here’s a pretty simple strategy adapted from traditional equities markets that can be easily implemented in the crypto space as well.
For every 15%-20% gain, take 5% profit. For every 15%-20% drop, buy in 5% more.
Even if your portfolio consists of 15-15 different coins, use your portfolio tracking software to monitor each asset in relation to where you purchased at. After a 20% increase (compared to your entry point), selling 5% back into fiat, BTC, or ETH assures you that you haven’t forfeited profits. After taking profits, reset the entry point to the price you sold at, and wait for the next 20% increase before taking more profits.
This plan is just to serve as a quick example, so make sure you get out there and find the strategy that really works best for you and your portfolio. The important part is to remember to take profits without liquidating your entire portfolio. If you successfully develop your strategy, then the next bull run and decline (like we just saw in December 2017 - January 2018) won’t phase you too much. Greed is a losing strategy, intelligence is a winning one.