Many new investors don’t have a plan when it comes to selling or cashing out their bought crypto’s.
If you are new in trading cryptocurrencies or shares, this might be the first time that you are asking yourself ‘‘Do I hold or sell my cryptocurrencies?’’, or ‘’What is the best moment to sell?’’.
These questions can be hard to answer even for experts. In this article we will explain the most common mistakes, how to avoid them, and tell you about the most used exit strategies in the crypto market.
How to create an exit plan for your cryptocurrency holdings
What is an exit strategy?
Technically, an exit strategy is a contingency plan created with the intent of liquidating a position in a financial asset. Or simply put: A plan to sell your financial assets.
The goal of an exit strategy is to limit the losses in case of a break-down. With that explained, we’ll discuss the most used exit strategies.
Why you need an exit strategy
A result of holding (or Hodling) a specific coin for too long (or due to greed) can result in massive losses, even when the price used to be way above the entry price.
Let me give you an example. If you decided to buy a cryptocurrency in January, and the prices happens to jump up with 20%, you might think that selling is the way to go.
However, all of your friends have decided to hold the coin. Meaning, you would be the only one missing out if the coin decided to moon (as crypto-fanatics would call it).
This phenomenon is also known as The-Fear-of-Missing-Out (FOMO), a mistake many investors make while trading. After happily looking at your portfolio, you decide to hold the coin for another 2 months.
Within these 2 months the price of your investment has turned south, and the price has suffered a massive -50% reduction. Meaning your investment is now worth less than it originally was.
What now? Do you sell and take the loss? Or do you hold and wait for a price recovery? Who knows, the coin may never return to its all-time high.
As you can see choices like this could have been avoided if you had an exit strategy in the first place. If you decided to sell your assets (or a small portion of the total) when the price rose with 20%, you would have made significant gains.
This is why you need to really think about a solid exit strategy. Below you will find the top 4 most used exit strategies in cryptocurrency.
Limit/Stop orders
One of the most and well-known ways to limit a loss, or take profits at a certain price range, is called ‘Limit orders.
What this means is that you are able to prematurely decide that your stock will automatically be sold or bought at a specific price point.
For example, you have bought 100 dollars of Bitcoin at a price of 25.000 dollars, and would like to sell that Bitcoin once the price hits 20.000 dollars.
A way to do this would be to set a limit order (to sell) at the price of 20.000 dollars. Meaning that once the price hits that specific price target, an order to sell the assets at that specific price will be added to the transaction-book.
The order will remain open until the price limit is hit, or until you decide to cancel the order.
What’s convenient about limit order is that they will be executed automatically, even when you are sleeping. Setting up limit/stop orders can be one way to limit losses or take profits.
However, you should keep in mind that in case of extreme price fluctuations the order might not get filled in time! None the less, having limit/stop orders in place is always a great idea
The Step-by-Step-Method
Always make sure you have a plan before investing in anything. You should think about when you will be satisfied with the result.
Will a 20% increase in price make you happy? Or are you someone that wants at least 200% profits before selling? This is where the Step-by-Step-Method comes into play.
The Step-by-Step-Method allows you to sell a predetermined percentage of your stocks at certain price points. There is not a golden rule that will lead to definitive success.
However, this strategy can prevent becoming to greedy, or selling to late, while still taking profits from time-to-time.
Many investors will always keep 5-10% of their holdings for a longer period of time, just in case of a bigger up-cycle or because they firmly believe in the project they have invested in.
It is always smart to take profits at a certain price range. An example of the step-by-step-method can be found below.
SELLING POINT PERCENTAGE TO BE SOLD% $25,700 10% $35,700 10% $49,700 20% $79,700 20% $104,700 20% $155,300 10%
Initial Investment Return
Another smart things investors do, is taking profits similar to the invested amount. For example, if you have invested 1000 dollars, taking profits to an equal amount on a later point in time could be a great way to liquidate the risk of losing money.
This way you make sure that no matter what happens, you can never lose more money than you initially invested
Re-investing
A big mistake many people make is that they invest in 1 project, and nothing else. Of course, this isn’t a disaster if the project you have invested in skyrockets.
However, betting on multiple horses could give you better results in the future.
This is why it is important for you to think about what projects you would like to hold for the long run. For example, if you think XRP (Ripple) is the future for global payments, you might want to support this project for a long-time.
If you have just bought XRP because you expect it to go up in the short term, we would recommend to sell projects like this using the Step-by-Step-Method. But now what?
You have successfully closed your trades and have made significant gains. Many investors will then re-invest their earnings into new projects to make even more significant gains.
Remember that it is always better to take profits before it is to late. Especially in the cryptocurrency market, price fluctuations happen very often, and can be quite extreme.
You can trust us when we say this. We have been there before. Taking profits from time to time is a sensible approach.
Conclusion
Before investing, we would strongly advise you to do your own research about a project! The cryptocurrency market can be very volatile, which can result in financial losses.
However, the opposite is also true. With safe investment strategies like the ones mentioned above, you minimize the risk of losing your investment.
In short we recommend you to use limit/stop orders, the Step-By-Step-Method, take profits and potentially reinvest your earnings into new projects.