Have you ridden the crypto wave all the way up and all the way down? It might be because you didn’t have a sell strategy. This resource provides the essential tools to explain why having a strategy is important and provides examples so you don’t repeat the same mistakes.
Disclaimer: This resource is for educational purposes only and is not financial advice. It is not intended to provide an endorsement for any specific profit-taking strategy but rather serve as a general guide to get you thinking of ways to exit the market. Everyone’s personal circumstances are different, and you should always consult your accountant and financial professionals before taking action.
Key Takeaways
- A sell strategy helps you make rational decisions, ensure you take profits, and avoid FOMO.
- Far too many people do not have an exit plan.
- Four common strategies include those based on:
- (i) Timeframe
- (ii) Price targets
- (iii) DCAing out
- (iv) Amount of unrealised profit
- Always consult your financial professionals, especially your accountant, to ensure your sell strategy makes sense for you.
Contents
- Why You Need A Strategy
- Exit Strategies: Price Targets vs Timeframes
- Practical Examples
- Considerations For Your Exit Plan
- Example: Ben’s Strategy
- Automate Your Strategy
- Consult Your Tax and Financial Professionals
Why You Need A Sell Strategy
In the fast-paced and often unpredictable world of cryptocurrency, it’s crucial to have a clear exit strategy.
A sell strategy is a plan for exiting your cryptocurrency or reducing your market positions at predetermined points.
It’s essential for making rational decisions, especially during market extremes. An exit plan not only helps in realising profits and minimising losses but also provides peace of mind, reducing the likelihood of panic selling or emotional decision-making.
Exit Strategies: Price Targets vs Timeframes
- Price Targets: Determined by the price of the cryptocurrency and/or the level of profit reached.
- Timeframes: Many look to market cycles or specific periods, irrespective of current prices. For example, the four-year Bitcoin halving.
Practical Examples
Let’s use an example.
Chris bought bitcoin (BTC) throughout 2019 and 2020. He got overwhelmed throughout 2021 and was never sure whether to sell any or all of his BTC. The volatile prices made him indecisive. He ended up not realising any profits. This time around, Chris understands that he should have a plan.
Luckily for Chris, there are various strategies out there. He should consider his options and decide which one aligns with his broader investment goals; below are four common types:
1. Percentage-Based Strategy
This strategy is as simple as it sounds. Followers of a percentage-based strategy will identify price targets for the cryptocurrency that they hold. At each price target, they will then choose which percentage of their position they will sell.
A percentage-based sell strategy can be useful for those who value recovering their principal (i.e., the dollar amount invested in a given asset) as soon as possible.
For example, ‘Chris’ plans to keep at least 40% of his BTC for the long term but wants to take profits once certain prices are hit. Below is an example strategy that Chris could implement.
| BTC Selling Point | % of BTC Stack |
|---|---|
| $50,000 | 10% |
| $85,000 | 10% |
| $100,000 | 20% |
| $150,000 | 20% |
2. Time-Based Strategy
As the name implies, this strategy is about selling at predetermined intervals (e.g. monthly, quarterly, yearly) regardless of price. Those who follow this strategy tend to believe the performance of BTC, and the overall crypto market, will continue to be highly cyclical (i.e. Bitcoin’s four-year cycle).
Below are two examples of time-based exits based on Bitcoin’s four-year market cycle.
| Time Period | Action |
|---|---|
| End of Year 1 | liquidate 5% if targets are met |
| End of Year 2 | liquidate 10% if targets are met |
| End of Year 3 | liquidate 20% if growth continues |
| End of Year 4 | Reassess |
| Period | Action | Notes |
|---|---|---|
| End of Year 1 | Liquidate 10% if certain profit targets are met | Recoup initial investment |
| Years 2 and 3 | Incremental sells at set price targets | Liquidate 10% of holdings at 50% profit, liquidate 15% of holdings at 100% profit |
| Throughout Year 4 | Larger sell-offs if the market peaks | Secure profits before substantial volatility |
| Post-Halving (Year 5) | Hold or gradually sell based on market dynamics | Adapt strategy based on new cycle dynamics |
3. Dollar-Cost Averaging Out
Picking market ‘tops’ is extremely difficult. Many people, like ‘Chris’, have found themselves in past bull markets always thinking the asset will go higher. And they become so fixated they forget to sell
To avoid this, some like to follow a strategy of dollar-cost averaging (DCA-ing) out of their position. A DCA strategy means gradually selling their holdings at regular intervals to average their exit price.
For example, someone who has 5 BTC with a low average cost may want to slowly sell some BTC each month if the price is above a certain predetermined level, or if BTC is in a certain period of its four-year cycle.
| Interval | Action | Notes |
|---|---|---|
| Starting Point | Begin DCA when BTC hits a predetermined price | Recoup initial investment |
| Month 1 | Liquidate 0.2 BTC | E.g. 10% of holdings at 50% profit, 15% of holdings at 100% profit |
| Month 2 | Liquidate 0.2 BTC | Secure profits before substantial volatility |
| Month 3 | Liquidate 0.2 BTC | Adapt strategy based on market dynamics |
| … | … | … |
| Final Month | Liquidate remaining BTC | Concludes the DCA exit strategy |
4. Amount of Unrealised Profit (or Loss)
Some people like to go about creating their sell strategy based on percentage of unrealised profit or loss. Technically, this is another flavour of a percentage-based strategy.
This approach can help people lock in profits and provide peace of mind. Let’s illustrate this strategy using Bitcoin as an example.
| Unrealised Profit or Loss (%) | Action | Notes |
|---|---|---|
| 50% | Liquidate 20% of holdings | Take profits and reduce exposure |
| 100% | Liquidate 25% of remaining holdings | Take profits and reduce exposure |
| 150% | Liquidate 30% of remaining holdings | Take profits and reduce exposure |
| 200% | Liquidate 40% of remaining holdings | Take profits and reduce exposure |
| Beyond 200% | Optional: sell more or hold | Decide based on personal goals and market conditions |
Some people expand on this approach to include levels where they will realise losses. This is entirely dependent on the individual’s goals and risk appetite.
We purposely don’t cover trading strategies, but if you’re interested, CoinDesk has great content on the topic!
Considerations For Your Exit Plan
Reflect on the following when crafting your exit strategy:
- Your original plan: Revisit your initial objectives and how they align with your current situation.
- What was your original plan when you first bought those cryptocurrencies?
- How long do you plan to hold?
- How much do you want to keep for the long term?
- Have you made life-changing amounts of money: Consider if you’ve achieved life-changing financial gains and the implications of not securing these profits.
- Tax implications: When is your tax due, what does your jurisdiction say about capital gains tax (CGT) and can you get a discount on CGT for holding?
- Many cryptocurrencies will be different: You may have a different strategy or other cryptocurrencies you want to hold for longer than others.
- Timeframe and asset holding: Determine how long you plan to hold certain assets and how that influences your exit percentage.
Example: Ben’s Strategy
To illustrate one way to go about creating a sell strategy, Ben (CEO of Collective Shift) shared the five steps that he followed:
- Planning: Ben starts by setting clear goals and price targets for his investments. He determines in advance the price points at which he will liquidate portions of his holdings. Ask yourself what price your cryptocurrency will have to get to in order for you to start selling.
Example: When X cryptocurrency hits Y price, Ben will liquidate Z% of his position. - Choosing an exchange: He selects a reliable and reputable exchange to carry out his transactions. This decision is based on factors like security, user-friendliness, and transaction fees.
Example: He uses Kraken for BTC. For altcoins, he usually uses Swyftx and CoinSpot. - Hardware wallet management: Ben knows he will use a hardware wallet to store his assets. He plans to transfer assets from his Ledger to his chosen exchange.
Example: He plans to use his Ledger to send to his nominated exchange. - Tax considerations: Ben accounts for potential tax liabilities. He sets aside a portion of his gains to cover any tax obligations, staying informed about the tax implications of his trades.
Example: Ben talks with Crypto Tax Australia (CTA) to understand the impacts of his crypto on tax. - Execution and review: Finally, Ben executes his orders according to the plan. He also reviews and adjusts his strategy as needed based on market changes and his financial goals.
Example: He reviews his strategy.
Automate Your Strategy
Planning is one thing, but adhering to it is another—particularly in an asset class as volatile as this one, where emotions can easily start to affect your decision-making.
Some people like to use automated software to increase the likelihood of adhering to their plan. For example, they create limit orders on exchanges to liquidate a cryptocurrency if it hits a certain price in the future.
For those who follow more time-based exit strategies, using calendar software (e.g. Google Calendar) can be a simple way to ensure you are notified when a certain date arrives when a sale needs to be executed.
Consult Your Tax & Financial Professionals
For personalised advice tailored to your circumstances and goals, consider consulting with a licensed financial professional. It’s always a good idea to run your strategy by a crypto accountant.
For more similar resources on creating your strategy, go to ‘Creating Your Personal Crypto Strategy‘ and download the associated PDF.