Definition

An exit strategy is a plan to either minimise your losses or ensure you take some profits off the table as your investments go up or down in value.

Understanding Crypto Exit Strategies

‘When should I cash out?’ is probably the most frequently asked question during any bull market. And for good reason.

It’s exhilarating to watch your portfolio increase during a bull run, but many crypto traders realise too late that they don’t actually have a plan in place for when things are going really well… or really badly.

In the past, this has led to countless traders seeing their portfolio go all the way up and then back down again without taking any actual profits off the table.

There are two ways a cryptocurrency exit strategy can help you:

1. Taking profits when things go well
2. Reducing losses when things go badly

Know your goal for each asset

While your exit strategy will depend on your investment goals and risk tolerance, generally it is recommended to have a rough goal of how much you want to make from any given crypto investment. This will depend on whether you think the coin has long-term potential, or if it is one you picked up to make a quick profit off some upcoming news & short-term price swings.

Take profits incrementally

After your asset hits a certain price point or percentage increase, you will want to start taking small chunks of profit to ensure you are realising some of your gains into fiat currency or a more stable asset. Crypto markets are highly volatile, and it is easy to get carried away by a pump and think that your asset’s price will increase forever. Remember: Profits aren’t real until you actually cash them out. 

What are the most popular exit strategies?

Step-by-step – taking small chunks of profit incrementally, as shown in the example above. (Note: many investors choose to keep at least a portion of their investment for the very long-term. 

Initial investment return – taking out your initial investment at a given point when you are in profit, ensuring that you can never lose more money than you initially invested. Never a bad idea. 

EXAMPLE

While we are not financial advisors and are of the belief that a good exit strategy should be tailored to suit the investor, here’s a super simple example to give you an idea of how a step-by-step exit strategy might look.

Rule: Take 5% of the profits for every 25% increase in price

Mike buys $1000 of Bitcoin. After a few weeks he has seen Bitcoin’s gradually rise by 25%. His $1000 holding is now worth $1250. Although he thinks Bitcoin is likely to keep rising, he wants to realise some of his profits, so he cashes out on 5% of his total investment.

5% of $1250 is calculated by: $1250 X 0.05 = $62.50

Mike sells $62.50 of his total Bitcoin holding back into fiat currency. Then he waits till his holding of $1187.50 goes up by another 25% (approx. $1484) before repeating the process. Mike can use profit/trigger orders to automate his exit strategy.

Reducing losses

Having an exit strategy for when things go badly is just as important as knowing when to take profits. It takes a certain level of emotional detachment from investments to accept that not all of your investments are worth holding on to.  If all the signs are telling you that a position is going to keep dropping, it may be wise to sell before your losses become bigger than they need to be.

However, keep in mind, volatility is completely normal in the crypto markets, and you should be okay with seeing your portfolio fluctuate in value. As Bitcoin has shown throughout  its history, even major crashes are often just dips before an even bigger rise. If you have faith in the fundamentals of a coin then it might be worth holding onto to it – after all, you only really lose when you sell!

That being said, if some catastrophic news comes out about one of your investments you will need to re-assess whether or not it’s an investment worth holding onto.

Key Takeaways

• Waiting till the bull run is in full swing to decide when to take profits is risky! Plan ahead before things get crazy.
• Taking profits is always a good thing, but keep in mind that many crypto assets have huge long-term potential.
• Determining early on what your goal is for each of your investments can be the difference between being a winner and a loser in a bull run.
• Using take profit/stop loss/trigger orders can be highly useful for reducing the time you spend watching the markets & making sure you stick to your pre-defined exit plan.
• Knowing where you are in the bull cycle can provide insight as to how aggressively you should be exiting positions.
• Let go of trying to sell at the absolute top of an asset’s rise. Timing the peak is near impossible. Take profits when an asset hits your desired price.
• If you make an exit strategy, stick to it!

Should my exit strategy be the same for all my coins?

If you’ve done your research, then you’ll know that cryptocurrencies can be vastly different from one another. They do not all serve the same purpose, and some are better suited to long-term gains rather than short-term ones.

For example, while a coin like Dogecoin might be expected to pump in the coming weeks, the tech behind the project is far from the best around, and so you would probably want to take profits sooner rather than later – projects without a long-term vision and solid tech rarely every stick around for long.

On the other hand, if you were to hold a coin like Chainlink or Ethereum, your exit strategy would probably be different. Chainlink is one of the leading oracle services, which is a type of crypto that provides essential real world data to Blockchains. It’s use-case is absolutely essential to the functioning of Blockchains and the crypto-sphere in general, and if crypto continues to grow and Chainlink remains the leading oracle service, there is the potential for astronomical gains down the track. On top of that, the total supply of Chainlink is fairly low compared to other cryptos, meaning that its price per coin could see some serious growth if crypto does go on to become the finance of the future.

With that in mind, you may want to take profits a little less aggressively with a coin like Chainlink, always keeping some portion of your investment just in case crypto blows up and 10 years later LINK has risen beyond anyone’s wildest dreams. It’s hardly a sure thing but anything is possible in crypto, and Chainlink is an example of a coin that is likely to be integral to the long-term expansion of the industry as a whole.

Here’s what a possible exit strategy for Chainlink could look like:

Selling Point: $40  | % to be sold: 5%
Selling Point: $60  |  % to be sold: 10% 
Selling Point: $80  |  % to be sold: 15% 
Selling Point: $120  |  % to be sold: 20% 
Selling Point: $150  |  % to be sold: 25%
Selling Point: $180  |  % to be sold: 25% 

The rest could be held long-term or decided upon at a later date when the market is more mature and you have a better idea of LINK’s potential to grow.

When is the best time to formulate an exit strategy?

Oversold:

Oversold refers to a situation where an asset is trading way below its true ‘intrinsic’ value. A lot of people are selling this asset, often due to panic selling or market overreaction, and these oversold conditions represents a good time to buy as the asset is underpriced and is likely to go up in the near future.

Overbought:

Overbought is when an asset is trading way above its intrinsic (true) value, without being supported by fundamental reasons. For example, a crypto’s price could be rising and rising despite the project not gaining any actual traction in the real world, these spikes in price are often due to unfounded hype or FOMO (fear of missing out). Overbought is when an asset is overpriced, meaning it is a good time to take profits and sell as a correction is likely to ensue.

Why is it important to stick to your exit strategy?

There’s no point creating an investment strategy if you’re just going to abandon it the moment things get heated. Plenty of traders set reasonable limits for the profits they want to make only to throw them out the window once their coins start heading for the moon.

While an exit strategy doesn’t have to be set in stone, it is all too common to see new traders get carried away with their gains, holding on to an asset all the way up and then back down again. At the very least it is a good idea to take your initial investment off  the table once you have reached a certain level of profit. That way, you’re just playing with your profits and then you can feel more comfortable holding and hoping for the moon.

How do trigger orders (aka limit/stop loss/take profit orders) work?

Trigger orders are the best way to enact your exit strategy. Their function is to execute a buy or sell order on an asset at a specific price. Not only do they automate the entire process for you, but they’ll make sure you stick to your plan when emotions start running high. Digital Surge offers an easy way to take profits or minimise your losses on an investment through its easy-to-use trigger orders (aka stop loss/take profit orders).

Here’s how they work.

Trigger orders do not lock your funds, so you can create multiple Trigger orders across different assets. Your Trigger orders will execute when the Trigger price is matched, allowing you to setup multiple trading and exit strategies at the same time. Your remaining Trigger orders will stay in place until they match. If your Trigger order exceeds your account balance at the time the Trigger order executes, the order will fail.

Benefits:

By setting Trigger orders, you can specify your trading strategy to enter or exit a position when the price is right without having to continually check the market conditions. You will be notified by email when your Trigger order is executed, allowing you to review your position. Your entire exit strategy can be automated while you sit back and watch the profits pile up without having to do anything.

For example, if you are trading BTC in the short-term, you could set up the following conditions:

Current price of BTC is $60,000

You have a balance of $55,000 AUD and 0 BTC

You set a trigger price of $55,000 to BUY 1 BTC

You also set a trigger price to SELL 1 BTC at $65,000

If during the night the price of Bitcoin suddenly drops down to $55,000 and then spikes up to $65,000 – both of your triggers would be met and you would have automatically purchased 1 BTC at $55,000 and sold it for $65,000 – returning a handy profit.

A Trigger order can have the following statuses:

You just need to ensure that you have enough funds in your account as the order may end up getting triggered but not filled unless the funds are available for the order. Untriggered & Unmatched Triggered orders don’t incur any trading fees – trading fees only apply to successfully completed trades. For more information on our different order types, click here.

How do support and resistance levels influence your exit strategy?

Support & resistance are a fundamental part of analysing a cryptocurrency (or any asset), especially in the short term. SR levels are used by crypto swing & day traders to plan the optimal entry/exit points and predict how a crypto asset’s price will move in the near future.

SR levels refer to important price levels on a chart that indicate the area at which an asset will:

• Fall to a certain price and then bounce back up as there is a sufficient demand from people wanting to buy at that price, thus preventing the price from dropping any lower (support level).
• Rise to a certain price level and be rejected, causing a reversal into a downwards trend as there are enough people willing to sell the asset at that price. This stops the price from going any higher (resistance level).

By having an understanding of where the support and resistance levels are for the price of any given asset you will be able to set your trigger orders in a way that optimises your exit strategy.

For example, if BTC seems to have a strong resistance level at 50k, and the price is currently at 45k, you may want to set a trigger order to sell just below 50k as there is a good chance BTC’s price will hit that resistance level and go back down.

Do I need an exit strategy if I am holding for the long-term?

While long-term HODLers won’t need an exit strategy in the short-term, it is recommended to have a rough idea of what you want to get out of the investment. HODLing for the long-term is a popular strategy but not always the safest way to ensure you leave with more money than you came with.

The crypto market is volatile and if you have made significant gains, you might want to consider taking at least your initial investment off the table. That being said, buying and holding for the long-term is a legitimate and popular strategy and while it’s not as important for HODLers to have a clearly defined exit plan, having a rough idea of when you want to start taking profits is a good idea – gains are only real once you take them off the table!

Will you be taxed for taking profits?

In Australia, yes. The moment you take profits or sell a crypto asset you can expect to be taxed on the profit under CGT.