#11 Deep Dive - Creating Exit Strategy
Let's create the strategy not to lose all the papergains we will make
Welcome fellow investooors! It’s crypto time so let’s dive right in. To access more content find us here on Twitter. Enjoy!
In today's edition of the newsletter, I want to focus on a different aspect of the market than usual. Today, we won't be discussing which projects to choose to maximize profits but rather how to prepare to actually make money in crypto without giving away all the gains when things get tough – and believe me, the vast majority of people lose the most capital this way.
Calculating an Exit Strategy
How many of us have experienced moments in the cryptocurrency market when our portfolios seemed to only go up, especially in the final stages of a bull run? Each day brought new gains, keeping us glued to the screen, preventing us from cashing out. We wake up in the morning, see more percentages added to our portfolio, and think we'll wait two more days, and then we'll definitely cash out at least part of it. Two days pass, and we tell ourselves that tomorrow for sure... Another two days go by, and we refresh the page several times because something must have broken – the portfolio has dropped by 20%. But if it was going so well in recent weeks, it should bounce back tomorrow, right?
Not exactly... And most of us have learned this the hard way.
Roundtripping, or holding onto paper gains that shrink each week in the hope that the price will suddenly turn around, is nothing new. It affects everyone, especially in the early stages of investing, when we lack not only experience but also emotional discipline and a strategy that could teach us that discipline.
That's why today's newsletter will be shorter but packed with tips and strategies on how to manage emotions and ensure satisfying profits when the bull run ends. If you're wondering why I'm writing about this now when it seems like we still have plenty of time until the end, think about this: when should we implement such strategies – a few months before the peak or at the last moment when it's easy to miss the top and fall down the other side?
#1 Strategy – Perfect Timing Doesn't Exist
The chance that any of us will hit the exact bottom during a bear market is much higher than hitting the peak of a bull run because price always leads market emotions. So, let's not kid ourselves that we'll sell our assets even 10% from the top. If we manage to, it will be a fantastic result, but how much of it is due to our market sense and how much to luck?
That's why it's so important to implement strategies that reduce the volatility of our emotions and market moods by averaging the exit price based on time. We can treat this as cashing out to stablecoins, for example, 5% of our portfolio once a month or 1.5% weekly. We don't have to set a fixed date because we might accidentally hit a local low. We can decide to cash out 1.5% weekly or 5% monthly, but we choose the moment in the week or month when we do it, with the limit being the last day of the week or month when we must cash out our funds if we haven't done so earlier. Sticking to these rules will ensure much better long-term results, even if short-term we might miss the local peak or sell at a local low.
Let's assume you have a portfolio worth $10,000 and decide to sell 5% monthly. You can divide this into payouts to stablecoins and BTC/ETH in a proportion that suits you. On one hand, this will limit your potential gain, but on the other hand, it will protect you from losing capital on bad trades or a trend reversal.
#2 Strategy – Fear & Greed
Market sentiments change extremely quickly, and it's tough to gauge their changes without the right indicators, which themselves are not perfect. However, they give us some foundation, an outline of the broader situation on which we can build our further decisions.
One of the most popular indicators is the Fear & Greed Index, which roughly reflects market sentiments at any given moment. Historically, it has well indicated market tops and bottoms. Link to the main F&G below:
https://alternative.me/crypto/fear-and-greed-index/
When creating a strategy based on the F&G indicator, we must remember that this indicator can stay at high levels for a long time as sentiment levels in crypto are very popular, and we may often see further price rallies of various altcoins when the F&G chart remains unchanged. Therefore, take this into account, as it may be worth combining this strategy with gradual market exits as mentioned in the previous point. However, if you feel more comfortable with less complicated strategies, you can focus on more condensed market exits.
Let's assume the Fear & Greed Index approaches 85 (indicating high greed). You can then decide to sell 15-25% of your portfolio. If the index exceeds 90, you can sell another 15-25%. You can also combine both strategies and start selling a higher percentage of the portfolio based on the set thresholds in the Fear & Greed Index.
However, Fear & Greed sometimes may not accurately describe market sentiments, so it's worth looking at other indicators with a similar methodology. Below are two dashboards from Dune by CryptoKoryo:
https://dune.com/cryptokoryo/fear-and-greed-index https://dune.com/cryptokoryo/crypto-buy-signal
#3 Strategy – Calculating Room for Growth
Imagine the crypto market as a year-long Le Mans race. Each project is a car, and each trend or narrative is a team. The best part is that we can bet not only on the final winner but also on the fastest teams and cars during specific time intervals. Our goal is to identify the most promising teams and their cars that will win a given segment of the race to reap the profit and move on to the next round of betting.
The problem is that many people try to pick the final winner too early, missing out on many bets along the way. This not only limits the final profit but also distorts our perception because perhaps during the race, someone else will take the lead, while our early favorite falls behind the young drivers.
Translating this analogy to the crypto market, remember to be aware of the energy depletion in a given trend, which might soon die out or need rest and have a weaker period. We also need to add realistic assumptions because we can't think that a mediocre project will suddenly jump into the Top 20 MarketCap. Let's be realistic. Look at the benchmark, compare other projects in the trend and their capitalization. See how much growth is realistically on the table, and estimate your exit levels. We can do this by referring to the market capitalization position, the MarketCap level of the project, comparing it to the largest project in that trend and the levels when the difference decreases, or a combination of all three options at once.
An example might be a meme coin being the second largest meme coin on Solana or Ethereum. We will track its battle with key levels of 600-650M McCap or 1 billion McCap, and we will cash out 10% of the position every 100M, starting for example from 400M McCap. Additionally, we can set levels of difference between the main meme coin and ours and also cash out 5% at set levels, for example, 1/10, 1/7, 1/5 in relation to the main project, and finally refer to the overall McCap and sell part of the position when entering Top100, Top50, etc.
#4 Personal Advice
Lastly, I would like to leave you with personal advice on exiting crypto. Create two baskets or two portfolios: one where you keep BTC and ETH, and another solely for stablecoins – or their basket, like USDC/USDT/DAI split 33% each.
By adhering to your market exit assumptions at certain levels, putting aside part of the gains as safe profits, you will move them to the first basket (BTC/ETH), and then to the second basket (stablecoins). Let me explain what this is about.
Migrating capital first to BTC and ETH keeps you in the game and avoids excessive emotions that you exited too early. On the other hand, it provides you with psychological comfort and portfolio safety. When the market starts heating up, you will gradually migrate your BTC and ETH from the first basket to the stablecoin basket, and from there as needed to fiat.
The most important rule: once the capital goes into one basket, it doesn't leave except to stablecoins or fiat.
So we have a migration Market -> BTC/ETH -> Stablecoins -> Fiat.
Selling in small batches teaches us the art of selling itself, which is extremely difficult. Just create a new payout portfolio and transfer 1% of the portfolio there. It won't lower the profits but will provide a huge mental advantage by breaking the mental barrier of selling.
The more you sell, the easier it becomes.
There's one more thing worth setting in advance with yourself – satisfaction levels.
The more our portfolio grows, the more we shift our mental satisfaction levels with the results. At the beginning of a bull run, we would be happy to reach level X of the portfolio, in full bull run suddenly we want X times 10, because regular X is not enough and seems too small.
Set three portfolio value levels that will satisfy you; these can be 'It's Okay' / 'It's Great' / 'Mega Growth' levels. Try to cash out at least 10% of capital at the first level, 25% at the second, and when reaching the third level, it's worth cashing out at least half or even up to 80% of the capital, because these are levels so high that it must be the late stage of the bull run.
A Few Closing Words
One of the hardest things in the crypto market is controlling greed and emotions. That's why we need to develop and implement an exit strategy long before the biggest and craziest gains start. When they come, believe me, keeping emotions in check will be incredibly difficult.
Market exit strategies don't have to be complicated to be effective. The goal is to exit the market with a profit by using a strategy you feel comfortable with and that forces you to make selling decisions when it may seem counterintuitive or against your emotions.
Create your own strategy from scratch or use the ideas from today's newsletter. Remember, the goal is simple – exit the market with a profit.
That’s all for today, thank you all for reading this week’s Deep Dive and see you in two weeks time! To access more content find us here on Twitter. See you there!
~ ModernEremite & Crypto o’Clock Team
This newsletter is provided for educational purposes only and does not constitute investment advice. It is not intended as a solicitation to buy or sell any assets, and readers are strongly advised to conduct their own research and seek independent financial advice before making any investment decisions. The authors and publishers disclaim any liability for any direct or consequential loss arising from any use of the information contained herein.