Profit-Taking Strategies

In crypto, we use the volatile price movements of smaller altcoins to increase our stablecoins and large-cap token holdings. The profit-taking strategy systematically realizes those gains, reduces portfolio risk, and allows investors to stay in the game. Without taking profit, you could see huge gains turn into massive losses. 

Below outlines a strategy to produce a return and pull money out of your crypto investments. We’ll assume there are no outlying opportunities or threats requiring immediate token selling (identified during monitoring). 

House Money

The real danger to your crypto portfolio is losing your initial risk capital. Removing this threat is the most effective way to ensure you remain profitable. You begin to win the investing game by playing with house money.

House money is the amount left over after liquidating some crypto holdings to remove your risk capital. The remaining tokens are profits you can hold, risk-free, and realize later in the bull market. Crypto investors often pull the risk capital after the portfolio has gone up by 100% or doubled in valuation—however, it’s possible to make this trade during any period the portfolio is in profit. 

An example would be buying 1 BTC at $10,000 and selling half of it at $20,000. The trade would give you $10,000 of risk capital back and 0.5 BTC as house money.

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Rebalancing

From the allocation strategy lesson, we allocated our initial risk capital based on some percentage of stablecoins, large-cap, and small-cap tokens. Rebalancing is a way to keep these ratios in alignment during periods of volatility. 

Volatility to the upside would mean selling the most volatile assets for stablecoins. Volatility to the downside would mean rebalancing to deploy stablecoins into volatile altcoins and large-caps.

Initial Allocation

For example, let’s consider an initial portfolio of $10,000 broken down into 50% BTC, 30% USDC, and 20% ORN. The goal is to accumulate more US dollars than the initial investment. 

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.5

$10,000

50%

$5,000

USDC

3,000

$1.00

30%

$3,000

ORN

20,000

$0.10

20%

$2,000

       

= $10,000

Bullish Uptrend #1

The portfolio became skewed to 55% BTC, 15% USDC, and 30% ORN towards the peak of a macro bull trend.

BTC and ORN had appreciated considerably in value.

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.5

$22,000

55%

$11,000

USDC

3,000

$1.00

15%

$3,000

ORN

20,000

$0.30

30%

$6,000

       

= $20,000

Portfolio Rebalance #1

We rebalance the portfolio to reflect 50% BTC, 30% USDC, and 20% ORN.

Rebalancing at current prices requires selling off 0.045 BTC and 6,667 ORN for 3,000 USDC = US Dollars. 

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.455

$22,000

50%

$10,000

USDC

6,000

$1.00

30%

$6,000

ORN

13,333

$0.30

20%

$4,000

       

= $20,000

Profit Taking #1

We cut our entire portfolio in half to recoup our risk capital of $10,000 (this example assumes no capital gains tax).

What’s left is our house money (aka profits).

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.2275

$22,000

50%

$5,000

USDC

3,000

$1.00

30%

$3,000

ORN

6,666.5

$0.30

20%

$2,000

  • $10,000 (initial risk capital)

= $10,000 (profit)

Bearish Downtrend #1

Let’s assume we go into a deep bear market where all assets lose 80% of their valuation. 

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.2275

$4,400

23%

$1,001

USDC

3,000

$1.00

68%

$3,000

ORN

6,666.5

$0.06

9%

$399.96

  • $10,000 (initial risk capital)

= $4,400.96 (profit)

Portfolio Rebalance #2

In the middle of a bear market, our worst-case scenario is selling the remainder of the portfolio (aka house money) for a $4,400.96 profit. We’ve already pulled the initial investment of $10,000. 

Let’s rebalance our new, risk-free crypto portfolio to complete our example. 

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.5

$4,400

50%

$2,200

USDC

1,320.29

$1.00

30%

$1,320.29

ORN

14,670

$0.06

20%

$880.19

  • $10,000 (initial risk capital)

= $4,400.96 (profit)

Bullish Uptrend #2

Barring unforeseen investment risks, we can repeat our exercise of rebalancing during a bullish trend.

Let’s assume the markets double in price on average from the bottom of the bear market. 

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.5

$8,800

59%

$4,400.96

USDC

1,320.29

$1.00

18%

$1,320.29

ORN

14,670

$0.12

23%

$1,760.40

  • $10,000 (initial risk capital)

= $7,481.65 (profit)

Portfolio Rebalance #3

In the example above, asset prices are close to where they initially started ($10,000/BTC, $1/USDC, and $0.10/ORN). 

Using our rebalancing strategy and house money, we now have a risk-free portfolio worth $7,481.65 and $10,000 to reallocate to other crypto projects. We’ve rebalanced the portfolio below.

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.425

$8,800

50%

$3,740.82

USDC

2,244.50

$1.00

30%

$2,244.50

ORN

12,469.41

$0.12

20%

$1,496.33

  • $10,000 (initial risk capital)

= $7,481.65 (profit)

Price Continuation (Speculation)

If all assets reached their previous all-time highs where we initially took out our risk capital, our portfolio would look like this:

Asset

Holdings

Price

Portfolio %

USD Value

BTC

0.425

$20,000

59%

$8,500

USDC

2,244.50

$1.00

15%

$2,244.50

ORN

12,469.41

$0.30

26%

$3,740.82

  • $10,000 (initial risk capital)

= $14,485.32 (profit)

From here, we would have rebalanced the portfolio to limit downside price action by selling the most volatile assets (ORN and BTC) for stablecoins (USDC). We may also consider taking additional profits in USDC. 

Bitcoin (BTC) Price Analysis

Below is a real-life example of a monthly Bitcoin (BTC) chart with multi-month ranges for buying (green) and selling (red) opportunities. You’ll notice that the buying zones are shorter than the ideal opportunities to make a profit.

Most cryptocurrency charts are similar to the BTC chart structure. However, their price changes may be more significant than Bitcoin’s.

bitcoin price chart

Dollar Cost Averaging (DCA) Out

If you do not want to keep a close eye on project developments to maximize gains or rebalance an entire portfolio, consider dollar cost averaging out of your investments. 

Dollar-cost averaging out means consistently selling portions of your assets while the portfolio value is higher than its risk capital. The larger the spread, the greater the profit. 

An example of DCA out of a position would be buying 10 ETH worth $10,000. You decide to wait until later in the bull market to break up the sale over a 5-week period. Every week you would sell 2 ETH, so long as the price is at least 20% above your average buy-in price of $10,000. If you sell all of the ETH, at a minimum, you will make a $2,000 profit.

Yield Farming

Some may argue that the most worthwhile assets should be profit-producing on their own – more commonly known as productive assets, which means the asset produces income without being sold. 

Free checks are nice. The cost is the risk of holding that particular asset. It is no wonder why the most volatile web3 projects produce the best yield. 

There are many ways to turn idle cryptocurrency and NFTs into productive assets. We will explore a few methods below.

Staking

Proof-of-stake platforms require you to delegate your tokens to the protocol to secure the network. In return, you get paid rewards until you withdraw. 

Many projects mimic this functionally to artificially reduce the circulating supply of tokens (without the consensus component).

Pro Tip: Be mindful of token lock periods that may prevent you from removing your assets from the platform. Smart contracts are also highly susceptible to bugs and hacks.

Liquidity Pools

Decentralized exchanges require independent actors to provide liquidity for trades. In return, the liquidity providers (LPs) get paid trading fees. 

The main concern with this activity is the potential for impermanent loss. Impermanent loss occurs when the price of an asset moves substantially in one direction or another in a liquidity pool. The value of your withdrawn liquidity would be lower than just holding the assets. However, earning trading fees often negate the impermanent loss.

P2P Lending

One of the benefits of DeFi is the ability to carry out peer-to-peer lending. When you provide liquidity on a platform for lending, you get paid an interest rate from the borrower. 

One should be mindful that lending rates change constantly, and you aren’t guaranteed a profit. Lending platforms may also require long waiting periods to withdraw assets.

Next Steps

View additional articles in this series:

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