Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
When Should You Take Out Crypto Profits?
You See Signs of a Bearish Future
Market sentiment can change on a dime. If your technical analysis of the cryptocurrency changes to bearish, it could be an excellent time to lock in profits. If global equity forecasts are bearish, the crypto market may follow suit.
If you zoom in on your investments on the micro level, there are bearish signs to look out for. Large holders may dump their crypto holdings and crash the price. But how can you anticipate this?
One way is to track public wallet addresses and match them with outspoken investors or members of the project’s social channels. You'll probably want to know if their sentiment changes or their wallet becomes active — our guide to crypto whales has more key information on wallet tracking.
Understanding and tracking token unlock schedules can help you anticipate and avoid short-term bearish price movement.
If You Reach Profit Targets
You should always go into a trade with a plan. An essential part of that plan is setting a profit target. A helpful practice is to write down the details of all your transactions in one place and include strict price targets.
Disciplined crypto investors often take out a profit when the price reaches their target. You can automatically do this with limit orders and automated trading strategies. Set your exit points ahead of time and let the software do the rest.
A reliable strategy to reduce the downside is to take out your initial investment when you hit one price target, then take profits at a higher mark.
Uncertainty in Markets
Uncertainty in markets can cause impulse or panic selling. This can arise when the macro market factors don’t paint a clear picture.
Uncertainty also arises when the market is waiting on an event to happen. These can be geopolitical events or policy decisions.
It might be time to take some profits if you don’t have a clear investment thesis during an uncertain market. Remember, unless you are day trading, you should let your investment thesis play out over time. Markets take longer to become efficient than you think.
When Market Fundamentals Alter
After seismic events like rate changes, geopolitical events, or bankruptcies, the crypto market can turn on a dime. Smart traders often use market reversals to their advantage.
One way to take advantage is by analyzing historical data. Using Pluto’s backtesting tools, you can research how tokens performed during market reversals and build strategies around them.
Automated trading strategies help you catch reversal trends early. And it’s always easier to make a profit during a bull market. So a reliable plan for some is simply not to buy crypto in a bear market.
Lack of Predicted Growth
Successful crypto traders evaluate the upside potential of their open positions. If there’s not enough upside, they take profits.
A popular way to gauge upside potential is to compare market caps. Market cap is the token price multiplied by the token supply.
It’s helpful to look at other market caps within the same crypto sector to approximate your investment’s growth potential. Look at the market caps of new coins, gaming tokens, lending tokens, payment tokens, and governance tokens.
Another way to predict growth is by analyzing on-chain metrics. You can track the users of DeFi protocols, NFT platforms, or any protocol with users on a public blockchain by querying the blockchain.
Don’t know how to query? You can make or view others’ queries on websites like Dune Analytics or Flipside Crypto.
If the crypto you’ve invested in is pre-product or doesn’t have publicly available metrics, try reaching out to the team. Most projects have Telegram or Discord chats where the team answers questions and gives updates on their progress.
When Shouldn’t You Take Out Crypto Profits?
You Have Confidence in Future Profits
If you have second thoughts about a trade, you should ask yourself if your thesis has fundamentally changed. Is there more information other than price that invalidates it?
If not, stick to your plan and HODL. Be disciplined about your take profit levels and stop loss levels.
Another important tenet of crypto investing is never investing more than you are willing to lose. So if you’ve followed this rule of thumb, you shouldn’t be overexposed to the market, and you’ll be more confident holding your positions.
You’re Falling Prey to Unreasonable Panic
When FUD (Fear, Uncertainty, Doubt) hits, it’s tempting to panic and exit your position. A discerning crypto trader can spot when FUD around cryptocurrency is exaggerated.
Crypto markets are volatile and highly reactive to new information. Markets move on rumors and half-truths. It’s essential to verify the information and wait for events to unfold before making rash investment decisions.
How Can You Take Out Crypto Profits? Five Methods
1. Keep Profits in Stablecoins
Because crypto assets are volatile, it is helpful to take your profits in stablecoins. Stablecoins are pegged to the US dollar (USD).
Another reason to take profits in stablecoins is it makes accounting easier. If you take your earnings in ETH, you will need help finding your cost basis come tax season.
But if you want to take profits in ETH, Bitcoin, or another token, you can always swap to a stablecoin first, then to the desired asset.
This way, you always know what your cost basis is.
2. Sell To Buy the Dip
Another great reason to take profits in stablecoins is to reinvest them later when crypto prices are down. “Buy low, sell high,” they say.
Prudent crypto investors often hold some stablecoins or “dry powder” to capitalize off large downward movements in price. When you take profits, you can set aside 10% of that profit to rebuy the same asset lower.
Keeping separate crypto wallets for different purposes is a great way to organize your crypto portfolio. And you can send that 10% to one wallet meant specifically for rebuying tokens when they dip.
3. Stake To Earn Interest
You can stake your profits in decentralized apps (dApps) or centralized platforms to earn passive income on your capital. This is called yield farming.
Most crypto exchanges, such as Binance, offer yield instruments similar to bonds that offer a modest yield on your capital. Usually on stablecoins. The annualized interest rates typically range from .5% to 3%.
DeFi interest rates can be sky-high and appear to offer three or four-digit APYs. You need to be extremely careful when staking on DeFi platforms. Most of the time, these rates are too good to be true. Here are some common pitfalls to look out for.
Many protocols bootstrap liquidity by offering a yield in their native token. They can dangle high APYs in front of you by calculating them based on the current token price.
The token can decrease due to supply and demand as more supply is emitted. And the APYs may fall back to earth. This is especially damaging to stakers if they are staking in the native token.
Smart contract vulnerabilities mean one bit of code causes you to lose all of your capital. Remember, not your keys, not your coins.
You are giving custody to another smart contract when you stake your tokens. You should make sure that the contract is airtight and bug-free before staking.
4. Peer-to-Peer Lending
Another option for where to park your crypto profits is on a peer-to-peer (P2P) lending dApp. The primary lending dApps are AAVE, Maker, and Compound, which are available on Ethereum and Polygon blockchain.
Most blockchains with smart contracts have P2P lending dApps. You stake your Eth, stablecoins, or other approved tokens in the lending contract — this is now your “collateral.”
P2P lending apps offer overcollateralized loans. Depending on the collateral type, you can borrow up to a specific percentage of your collateral’s value.
Users earn interest on their collateral and pay interest on any borrows they make. Debt and interest are repayable to the lending smart contract.
P2P lending also enables you to leverage positions. For instance, to build a leveraged ETH long using AAVE, you would deposit ETH as collateral, borrow stablecoins, swap those to Eth, then rinse and repeat.
You can deposit stables to borrow ETH and repeat to build a leveraged short position.
5. Sell at a Small Percentage Over Time
A great way to make crypto profits is by selling a fixed monthly percentage or amount. It can be a percentage of your profit or your cryptocurrency investment stack. This is a great way to ignore price volatility and consistently take out a profit.
Pick a number and stick with it. 10% of your weekly profit is an excellent way to exit a position. You can also take out 50% of the profit from the trade and then slowly sell off the rest.
Everyone has different profit-taking strategies. And minor tweaks like the one mentioned above can affect long-term profitability.
With Pluto, you can backtest your trading strategies on historical data. So you can measure the impact of minor investing strategy tweaks. And you can use automated trading to take out profits over time. Learn about how auto-rebalancing works on our platform
Reinvesting Your Crypto Profits
How Can You Choose the Right Crypto When You Reinvest?
Deciding where to reinvest your crypto gains is essential to your crypto trading strategy. Price pumps in crypto are cyclical. Altcoins tend to follow large-cap price action.
If you traded a significant price move in Bitcoin (BTC), you could look at what altcoins have historically followed such a move. It’s always wise to look for laggards after big market swings.
Another popular strategy for reinvesting profits is trading continuation trends. If a token has momentum and the chart looks healthy, you could put a small chunk of your earnings back into the trade. This strategy is also called momentum trading.
Of course, trading cryptocurrency continuations can be tricky, so it’s essential you’re using the right indicators and looking at historical data.
The Bottom Line
There are many reasons to take out profits when trading crypto. Knowing when to take profits out is just as important as knowing how. You can take profits based on market trends or technical analysis.
Many like to place recurring sell orders every week, so they are always taking out profits. Whatever your method, take profit early and often.
Crypto investing is easier when you have a plan. And to make an effective trading plan, you need the best tools and data — check out our free backtesting and trade automation tools.
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