As an investor in crypto, it can be exciting to tap on the “buy” button and see your account fill up with your new cryptocurrency, but how do you decide what to do next?
You turn to your crypto exit strategy — a vital part of your overall investment approach that aligns with the level of risks you are comfortable with, your investment time frames, the amount of losses you can afford, your profit objectives, and any of your other investment motivations.
What is a crypto exit strategy?
In simple terms, a crypto exit strategy is your plan for when and how much of your cryptocurrency to sell.
It determines your responses to the price changes of your investment, and it can also include a plan for non-price changes, such as the introduction of new regulations, or even personal events or motivations like being able to afford a bigger house.
So don’t make the mistake of thinking that exit strategies are only executed when prices are going down (bearish )!
Why do you need a crypto exit strategy?
Five main reasons: minimising losses, realising profits, maximising profits, responding to non-price changes, and achieving your personal goals.
Let’s look at each reason in detail.
Minimising losses
Let’s say you buy a cryptocurrency and its price starts dropping. Do you hold and wait till the price goes higher? There is always the chance that will never happen, and the price continues to fall. You thus incur a much larger loss than if you had sold it earlier.
Your crypto exit strategy can prevent this larger loss.
A common crypto exchange tool to minimise losses is the Limit/Stop order, where you pre-determine the sale of your cryptocurrency at a specific price point. For example, let’s say you bought some Bitcoin at a price of $20,000. Having considered the amount of losses you can afford, you decide that you would sell your Bitcoin if the price hits $15,000. Limit/Stop orders enable you to automate placing an order to sell your Bitcoin at this specific price on the market.
This automation is not only convenient, it is an effective tool to limit the involvement of emotions , which generally tend to cause us to act against sound investment principles, such as holding on to our assets for too long due to over-optimism.
You might have noticed that Limit/Stop orders can also be used to realise profits when you set them at a price higher than what you bought your cryptocurrency at, and this brings us to the next reason for having a crypto exit strategy.
Realising profits
You never know when prices will fall, so realising profits enable you to grow your wealth and have more funds for spending or investing in better-performing cryptocurrencies.
As mentioned, Limit/Stop orders can be used to realise profits, but you don’t always need to sell 100% of a cryptocurrency you own in a single transaction — you can also employ the Step-by-Step method, where you use Limit/Stop orders to sell a pre-determined percentage of your cryptocurrency at various price points.
For example, if you bought Bitcoin at $20,000, your Step-by-Step plan can look like this:
If you did the math for this particular example, you’ll find that the plan leaves aside a small amount to be held. Many investors do this for the chance that the price of the cryptocurrency skyrockets or they believe in the longer-term potential of the underlying project.
Nothing is more frustrating than seeing your unrealised profits decline into losses, so it is important to realise your profits, which is also crucial for…
If you cashed-out and made profits, don't forget to comply with your tax obligations. Here is our crypto tax guide for Switzerland .
Maximising profits
Having a crypto exit strategy also helps you capitalise on new or better opportunities, enabling you to enjoy greater gains.
If your crypto investment is doing well, you might still want to realise your profits and use the earnings to invest in better-performing crypto assets. This accelerates the growth of your wealth.
But what if your crypto investment is not performing? You can hold on to it for longer than you expected in hopes of an up-cycle, but your investment is now locked and unavailable for making gains in more promising crypto assets. Your crypto exit strategy helps you minimise your losses and unlock those funds for better opportunities.
This is why many crypto investors have a re-investment strategy where they sell a part or all of their cryptocurrency to buy other assets. They can also invest in the same cryptocurrency later when it becomes favourable — and this can certainly happen in the cryptocurrency market, where prices can fluctuate due to factors within and beyond the market itself.
Responding to non-price changes
You might also want to sell your cryptocurrency due to events that impact the market or cause the outlook of your investment to change.
Perhaps certain regulations in your country will hinder the development of the project underlying your cryptocurrency, and you decide it might be time to re-invest in another cryptocurrency that gained sudden potential as several banks decided to accept it as a viable form of payment (that actually happened with Bitcoin).
While your crypto exit strategy is not able to account for all possible non-price changes, it is certainly the foundation on which you make your decision of when and how much of your cryptocurrency to sell in response to these events. It can even be used for more personal reasons too.
Achieving your personal goals
I am not going to attempt listing all the possible reasons you might have for investing in cryptocurrency, but I can illustrate one scenario where your crypto exit strategy is used to achieve a specific personal goal.
Let’s say you’re saving up for a new personal computer, but you want to grow that fund so that you can get a really good laptop. You are new to investing, so you’d rather ease into the crypto market with a cryptocurrency that excites you with daily gains, and you decide to invest in CHSB as it can provide you a daily yield . Because there isn’t a minimum investment period, once your initial investment grows to your target amount, you sell your CHSB and use the money to get that laptop you’ve been eyeing!
Choosing the right crypto exit strategy
Your crypto exit strategy should align with your overall investment plan, and with the many different exit strategies available, choosing the right combination will help you achieve your investment goals effectively.
For example, if you have the freedom for very long investment periods, your priority might be largely to maximise profits and minimise losses. Your exit strategy in this case could be characterised by higher profit goals, since you could stay invested for more market cycles.
Here are some of the most common strategies that investors utilise as part of their plans to sell their cryptocurrencies.
Price-based exits
One of the simplest exit strategies is selling your cryptocurrencies based on price or percentage targets. For example, if you bought a cryptocurrency at $10, you might set your target sale price at $15. Alternatively, you may decide based on percentage — you might sell only when the price is 300% of your purchase price, so you sell when the price is $30.
This strategy can prevent holding on to an asset for too long due to over-optimism, but it can lead you to miss out on opportunities should the price stay out of your target for an extended time. Furthermore, how do you know if your price targets make sense for that particular cryptocurrency? A 300% price target can be achieved in a few days for a highly volatile cryptocurrency, but it might take months for another with a price that fluctuates slowly.
A more informed approach will be to consider chart patterns such as support and resistance levels, where:
- Support occurs when a cryptocurrency bounces off a series of lows in price, indicating the level at which demand is strong enough to stop its price from falling any further. When its price breaks a support level, it could mean further downside pressure. Therefore, consider placing Limit/Stop orders below support to protect your portfolio.
- Resistance occurs when a cryptocurrency bounces off a series of highs in price, indicating its supply is preventing its price from moving higher. When the price struggles to break resistance, consider taking profits.
Understanding the support and resistance levels, along with the volatility of the price of a cryptocurrency, will give you a good idea of the reasonable losses and gains you can expect per cycle. This becomes the foundation for other non-price exit considerations.
Scaled exit
This strategy uses the Step-by-Step method to sell parts of your cryptocurrency at various price points.
With the scaled exit, you can sell winners slowly and sell losers quickly, which is a strategy used by some investors. We all hope to always buy winners, but it’s more often that our portfolio will contain a few bad eggs. Our emotions may cause us to insist that we made a right choice (especially when bulls and bears are always arguing on Twitter), but that risks holding on to under-performing cryptocurrencies for too long while better opportunities slip by.
This exit strategy can help you cut your losses quickly so that you can invest in other cryptocurrencies while taking regular profits from better-performing cryptocurrencies.
Additionally, your understanding of the cryptocurrency’s resistance levels will help you decide what are the expected percentage profits across its upcoming price cycles and guide your selling points for the various portions of your cryptocurrency.
Profit/Loss exits
You can also sell based on the amount you are willing to lose and expect to gain.
For example, you might want to trigger the sale of your cryptocurrency if it loses you 1% of the overall amount you have invested to protect your wealth. Conversely, you may pre-determine to sell your cryptocurrency once it makes you a 20% profit.
Again, knowing basic technical analysis such as support and resistance levels will give you a sense of the likely percentage gains and losses over various timeframes.
Initial Investment Return
A common practice by investors is to aim for an Initial Investment Return, where you take profits equal to the amount invested. This is a nice position to be in because after you pocket your initial investment, you can only be earning more from that cryptocurrency.
Opportunity-cost sell
A form of re-investing is constantly monitoring, researching and analysing the market and selling non-performing crypto assets to acquire new ones that present better opportunities.
You can achieve higher profit-maximisation when you combine the opportunity-cost sell with the scaled exit, where you liquidate under-performing cryptocurrencies quickly and take profits from selling parts of your performing cryptocurrencies to invest in other cryptocurrencies. With this combined approach, you regularly invest in new opportunities while keeping a stake in strong assets.
Timed exit
You can also define the maximum amount of time you plan to stay invested in a particular cryptocurrency. What you do when you arrive at that time depends on you, but you can at very least use this as a signal to re-evaluate your investment. This strategy is useful when your cryptocurrency’s price is moving against you but not enough to trigger a loss-minimising action, or when it’s moving up too slowly for your liking.
Closing thoughts
A crypto exit strategy is simply a plan for when and how much of your cryptocurrency to sell. Depending on your goals, the “when” can include a wide list of price targets and market scenarios or be as specific as a single personal objective, and the “how much” can be as varied or detailed as well.
Always make sure you have a plan before investing in crypto, and ensure that plan includes your crypto exit strategy!
