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Mastering the Crypto Exit Strategy: Maximize Your Returns and Minimize Your Losses in 2023

Learn how to develop a winning crypto exit strategy to protect your investments and maximize your returns. Discover the best practices and key factors to consider when planning your crypto exit strategy.

What is a Crypto Exit Strategy?

A cryptocurrency (crypto) exit strategy is a plan made in advance that stipulates how a cryptocurrency investor/trader will eventually sell their cryptocurrency holdings. A good exit strategy is a procedure that states under what conditions a profit is realized or, on the flip side, losses are cut.

Exit Strategy Essentials: Why Every Crypto Trader Needs a Plan

A crypto exit strategy is vital for managing risk and maximizing returns on a cryptocurrency investment. Without a plan for when to sell, an investor may hold onto a losing investment for too long or sell an asset with the potential for gains.

crypto exit strategy planning

An exit strategy helps a cryptocurrency trader make rational and informed decisions about when to sell based on their investment goals and risk tolerance. Additionally, an exit strategy can help an investor to diversify their holdings and manage overall portfolio risk.

Navigating the Emotional Rollercoaster of Trading: Understanding and Managing Human Emotion

Creating a crypto exit strategy in advance allows you to make rational decisions not influenced by your emotions.

66% of investors have made an impulsive or emotionally charged investing decision they later regretted (based on research done on more than 1,100 investors)

MagnifyMoney

There are several reasons why people may make trades based on emotions rather than logic and reason. One reason is that people often overreact to short-term events, leading to impulsive decisions. Additionally, people may be influenced by biases, such as a tendency to overestimate their abilities or be overconfident in their predictions.

rollercoaster

Finally, external factors may affect people, such as media coverage or the actions of other traders, which can create a sense of FOMO (fear of missing out) or excitement that leads to impulsive trading decisions.

Having a crypto exit strategy that you stick to prevents you from making rash decisions in the moment. For that reason, some investors prefer utilizing programs such as crypto trading bots to trade for them, using the investor’s strategies.

Understanding the Different Types of Exit Strategies

Exit to Profit: Maximizing Returns with a Price-based Strategy

Price-based exits are a type of crypto exit strategy that focuses on the current market value of a particular cryptocurrency. This strategy involves setting a specific target price for a coin or token and then selling it once it reaches that price.

A price-based exit strategy can be valuable for those looking to capitalize on short-term gains or those with a specific target in mind for their investment. One of the key benefits of price-based exits is that they are relatively straightforward to implement, making them a popular choice among crypto traders.

Starting Things Simple: The Take Profit Exit Strategy

The Take Profit (TP) exit strategy specifies at what price or percentage change you will sell your cryptocurrency investment.

For example, if you purchased Bitcoin at $20,000, a 1% TP would mean that you would sell your Bitcoin for $20,000 * 1.01 = $20,200. Leaving you with a profit of $200, or 1%.

The Take Profit (TP) exit strategy is often combined with the Stop Loss (SL) exit strategy.

A stop loss specifies at what price you will sell your cryptocurrency investment. A stop loss is set below your entry price and is usually utilized to cut your losses short on an investment.

For example, a SL at 1% with an original buy-in price of $20,000 would be $20,000 * 0.99 = $19,800. When the price is $19,800, you will sell your cryptocurrency investment for a $200 loss.

Scaling Up for Success: Achieving Optimal Exits with a Scaled Strategy

Scaled exits are a crypto exit strategy that involves selling a portion of your investment at different price levels. This can be a helpful strategy for those looking to lock in profits while leaving some room for potential gains.

The idea behind scaled exits is to sell a portion of your investment at a certain price level and then to sell additional amounts at higher price levels as the value of the cryptocurrency increases. This allows traders to take profits at multiple levels, reducing the risk of missing out on potential gains. Scaled exits can also gradually reduce your overall exposure to a particular cryptocurrency, which can help manage risk.

The most challenging aspect of a scaled exit is knowing where a specific cryptocurrency’s potential upwards price range is.

For example, if you purchased 1 Bitcoin at $20,000, and you are confident that 1 Bitcoin will reach $100,000 in 1 year. You might create a scaled exit where you will sell

  • 0.25 Bitcoin for $50,000
  • 0.25 Bitcoin for $75,000
  • 0.25 Bitcoin for $90,000
  • 0.25 Bitcoin for $100,000

But suppose Bitcoin never reaches above $70,000 and instead falls back to $15,000. In that case, you might have never realized profits on most of your Bitcoin investment. 

Cycle Your Way Out: Navigating Market Fluctuations with an Exit by Cycle Strategy

Exit by cycle is a crypto exit strategy that considers a particular cryptocurrency’s historical performance. This type of strategy involves identifying patterns or cycles in the market that have been shown to be predictive of future price movements (potentially).

By understanding these cycles, traders can make more informed decisions about when to enter and exit a particular trade. This can be a good strategy for those looking to take advantage of long-term trends in the crypto market.

The idea behind exit by cycle is to buy a cryptocurrency at the start of an uptrend and exit the position when it reaches a peak of the cycle, or the trend is reversing. It’s essential to research and analyze historical price data, volume, and other indicators to identify patterns or cycles. Once the patterns are identified, the trader can set a target price or time to exit the trade.

The Bitcoin Rainbow Chart

rainbow chart

There are many great tools to visualize crypto market cycles; one of the most popular tools is the Bitcoin rainbow chart which plots Bitcoin’s current price within a labeled, logarithmic rainbow scale.

Portfolio Perfection: Achieving Optimal Exits Through Strategic Portfolio Management

Exit by portfolio is a crypto exit strategy that involves managing the overall balance of your investment portfolio. This strategy involves regularly reviewing your portfolio and adjusting based on changes in market conditions and your personal investment goals. The idea behind exit by portfolio is to ensure that your portfolio remains well-diversified and that you are not overexposed to any particular cryptocurrency.

person sketching pie chart

The process typically involves setting a target allocation for each cryptocurrency in your portfolio and periodically reviewing it to ensure it still reflects those targets. Suppose a particular coin or token is no longer performing well or has become a more significant portion of your portfolio than you are comfortable with. In that case, you may sell some or all of your position. On the other hand, if a coin is performing well or you want to increase your exposure to a particular currency, you may choose to buy more.

For example, if you hold four cryptocurrencies in your portfolio that you believe are equally valuable, for the sake of argument, let’s say

  • 25% Bitcoin
  • 25% Litecoin
  • 25% Ethereum
  • 25% BNB

And within a week, your BNB holding doubles in value, then your portfolio will look as follows:

  • 20% Bitcoin
  • 20% Litecoin
  • 20% Ethereum
  • 40% BNB

At this point, you might be overexposed to BNB. To counter this, you can either rebalance your holdings to an equal allocation by selling off part of your BNB holdings or investing in a new cryptocurrency not yet in your portfolio.

Exit with Flexibility: Navigating Market Volatility with a Dynamic Exit Strategy

Trailing take profit (TTP)

Trailing take profit (TTP) is a type of crypto exit strategy that allows traders to lock in profits while also allowing for the potential for additional gains. 

This strategy involves setting a trailing stop-loss order, which automatically adjusts the exit price as the value of the cryptocurrency increases.

trailing stop loss visualization

A trailing take profit works by setting a stop-loss order at a certain percentage or dollar amount below the current market price. As the price of the cryptocurrency increases, the stop-loss price also increases by the same percentage or dollar amount. This allows traders to lock in profits while also allowing for the potential for additional gains.

For example, if a trader sets a trailing stop-loss order at 5% below the current market price, and the price of the cryptocurrency increases by 10%, the stop-loss order will also move up by 5%, ensuring that the trader can lock in a 5% profit while still leaving room for additional gains.

TTP can be relatively difficult to perform by hand, especially when trading on short timeframes or very small ranges (0-1% profit range), as prices can move very quickly. On the crypto market, it is not uncommon for the price of a cryptocurrency to move by 1% in a single minute; hence this strategy is often automated.

Users can backtest this strategy for free using the BravoBot crypto trading bot.

Grid trading strategy (Gridbot)

Timing the market is like catching a falling knife; you never know when to execute and grab the knife (complete the buy order). With this assumption in mind, why not make small, spaced-apart purchases instead? At least then, you will get an average.

Gridbot is a type of trading bot that uses a grid trading strategy. There are various alterations of the Gridbot, but they all work on the same principle -The Grid trading strategy.

The Grid trading strategy involves placing multiple buys and one or more sell orders at different price levels to profit from the market’s volatility. The bot uses a grid of orders spaced at various intervals, allowing it to take advantage of small price movements in either direction. The grid bot is designed to be highly customizable, allowing traders to set the size of the grid, the spacing between orders, and the profit targets for each order. It is also able to handle multiple trading pairs, making it a versatile tool for cryptocurrency traders.

An example of how a grid trading strategy can make for a dynamic exit strategy

Suppose you purchase 0.1 Bitcoin at $20,000, and your Take profit is 1%; thus, your take profit price is $20,200.

Using the grid trading strategy, you set your next grid buy level at 5% below your entry price. $20,000 * 0.95 = $19,000.

Now imagine the price of Bitcoin lowers to $19,000. You decide to buy another 0.1 Bitcoin for $19,000.

You now own 0.1 Bitcoin for $20,000 and 0.1 Bitcoin for $19,000, meaning you now have a total of 0.2 Bitcoin for an average of $19,500.

Because your average price has decreased, so has your 1% take profit level.

Your 1% take profit price used to be $20,200. But it is now $19,500 *1.01 = $19,695.

Now that your take profit has lowered, it could be easier to get out of this investment, as the take profit level has also decreased.

gridbot visualization

The Grid Trading Strategy (Gridbot) is by far the most popular exit strategy used on BravoBot, and most people have a lot of success with it. You can create a grid trading strategy and test it on the last 365 days of data for free and see the results yourself.

Time-Based Exit Strategy

A time-based exit strategy is a method for exiting a position in a cryptocurrency that is based on a predetermined amount of time. This can include holding a position for a certain number of days or weeks before selling or setting a specific date for selling.

The idea behind this strategy is to take the emotion out of the decision-making process and have a plan before entering a trade. This can help traders avoid impulsive decisions that are based on short-term market fluctuations.

Additionally, time-based exit strategies can be helpful for traders who have a long-term investment horizon and want to hold a position for a certain period before evaluating its performance.

Long-term Capital Gains Tax

There can be tax benefits to holding a cryptocurrency for an extended period of time. In many jurisdictions, long-term capital gains tax rates are lower than short-term capital gains tax rates. This means that if you hold a cryptocurrency for a particular time (usually over a year) before selling it, you may be eligible for a lower tax rate on any gains you make from the sale.

Additionally, holding a cryptocurrency for an extended period may allow you to take advantage of any losses you incur. Capital losses can be used to offset capital gains, which can help to lower your overall tax liability.

It’s important to note that the tax laws regarding cryptocurrency are still evolving and vary by jurisdiction. It’s best to consult with a tax professional or check your country’s or state’s tax laws before making any decisions.

While sitting on an investment for extended periods, lending or staking your investment might also be worthwhile, which we will elaborate on next.

Lending out using Aave or Compound

Aave and Compound are decentralized lending protocols that allow users to lend and borrow cryptocurrency assets. These protocols use smart contracts to facilitate the lending process and manage each loan’s collateral and interest rate.

aave logo
Compound logo

When a user lends out their cryptocurrency assets on Aave or Compound, they receive a return as interest. The interest rate for each loan is determined by the supply and demand for the specific asset being lent. The interest rate can fluctuate based on market conditions, and the lender can choose to withdraw their assets at any time.

When a user borrows an asset on Aave or Compound, they must provide collateral as another cryptocurrency. The value of the collateral must be greater than the value of the borrowed asset, and the borrower will also be charged interest on the loan.

Aave and Compound are decentralized and non-custodial platforms. The user retains control of their assets and does not need to trust a centralized entity to have custody of them.

Overall, lending on Aave or Compound allows cryptocurrency holders to earn passive income by lending out their assets and making interest on them.

Stake Your Claim: Maximizing Returns on Your Cryptocurrency Investment Through Staking

Cryptocurrency staking is the process of holding funds in a wallet to support the operations of a blockchain network. In return, the staker is usually rewarded with additional cryptocurrency. This process helps to secure the network and is often used in proof-of-stake (PoS) consensus algorithms.

binance staking

On Binance, users can use flexible or locked staking, depending on how quickly they want access to their cryptocurrency and what type of returns they would like to have.

What are the best Exit Strategies for Crypto?

There are several exit strategies that investors and traders can use for cryptocurrency trading. The exit strategy utilized depends on the investor’s risk profile; popular crypto exit strategies which we have mentioned include:

  1. Time-based exit strategy: This strategy involves holding a position for a certain period before selling, taking the emotion out of the decision-making process, and having a plan before entering a trade.
  2. Dynamic exit strategy: Usually involves using a trading bot that utilizes a trailing take profit or grid trading strategy. The bot adjusts the exit strategy based on the current market conditions, allowing for a more flexible approach to exiting a position.
  3. Portfolio exit strategy: This strategy involves selling some of your cryptocurrency holdings to diversify your portfolio and manage overall risk.
  4. Cycle exit strategy: This strategy involves identifying and exiting a position during specific market cycles, such as a bear or bull market.
  5. Scaled exit: This strategy involves selling a portion of your position at different price levels in order to maximize profits and minimize losses.
  6. Price-based exit strategy: This strategy involves setting a specific target price for a coin or token and then selling it once it reaches that price. This is a straightforward strategy that is easy to implement and can be helpful for those looking to capitalize on short-term gains.

It’s important to note that there is no one-size-fits-all crypto exit strategy; the best strategy will depend on an individual’s investment goals, risk tolerance, and market conditions. Investors should carefully consider their personal circumstances and research before making any investment decisions.

Choosing the Right Crypto Exit Strategy

Choosing the right crypto exit strategy can be challenging, depending on various factors, such as your investment goals, risk tolerance, and market conditions. However, it is crucial to have a plan before entering a trade to maximize returns and manage risk.

Some of the least risky strategies include a time-based exit strategy, cycle exit strategy, and portfolio exit strategy.

A time-based crypto exit strategy involves holding a position for a certain period of time before selling, which can help to avoid impulsive decisions based on short-term market fluctuations.

A cycle crypto exit strategy involves identifying and exiting a position during specific market cycles, such as a bear or bull market. It requires a lot of market knowledge and the ability to anticipate market movements.

A portfolio crypto exit strategy involves selling a portion of your cryptocurrency holdings in order to diversify your portfolio and manage overall risk.

Other strategies, such as dynamic exit strategy, Scaled exit, and price-based exit strategy, are also worth considering. Still, it’s important to evaluate them based on your own investment goals and risk tolerance.

BravoBot users have achieved as high as 200% annualized returns using dynamic exit strategies. On the BravoBot Leaderboard, some of these trading strategies are shared for free.

BravoBot trading on Binance exchange

Using a trading bot for dynamic crypto exit strategies, such as a grid bot or trailing take profit, can be beneficial for several reasons:

  1. Automation: Trading bots can automatically execute trades based on pre-programmed strategies, which can help to eliminate the emotional and psychological biases that can influence human traders.
  2. Flexibility: Trading bots can adapt to changing market conditions by adjusting their exit strategies in real time. This allows for a more flexible approach to exiting a position, which can help to maximize returns and minimize losses.
  3. Speed: Trading bots can execute trades faster than human traders, which can be especially important in a fast-paced market where time is of the essence.
  4. Scalability: Trading bots can handle multiple trading pairs and exchanges, making them a versatile tool for cryptocurrency traders. 
  5. Backtesting: Most trading bots have a backtesting feature that allows users to test the bot’s performance on historical data, which can help to fine-tune the strategy and identify potential issues. BravoBot, for instance, allows up to an unprecedented 365-day backtests.
BravoBot trading on Binance graph

It’s worth noting that using a trading bot does not guarantee success, and it’s important to thoroughly research and evaluate any trading bot before using it. Additionally, it’s always recommended to consult with a financial advisor or professional before making any decisions.

If you are interested in reading more about crypto trading bots. Please read our post ‘Yes! Crypto Trading Bots are Profitable. Cryptocurrency Trading Bot Insiders’ Look at Trading Bot Profitability‘.

Final Thoughts: Summing Up and Moving Forward

In conclusion, having a crypto exit strategy is essential to managing risk and maximizing returns on a cryptocurrency investment. Without a plan for when to sell, an investor may hold onto a losing investment for too long or sell an asset with the potential for gains.

Different exit strategies cater to different needs and goals; evaluating them is important based on your investment goals and risk tolerance.

Time-based exit strategy, cycle exit strategy, and portfolio exit strategy are considered less risky. In contrast, dynamic exit strategies such as grid bot or trailing take profit can be beneficial when utilizing a trading bot. However, it’s essential to thoroughly research and evaluate any trading bot before using it and always consult with a financial advisor or professional before making any decisions.