Learn Digital Currency: How to Cash In On Your Crypto Investment with Exit Strategies
As with any investment, crypto included, there are risks. Naturally, you'll want to make the most out of your investment, but you don't want to hold onto your investment for so long that things start going downhill.
Even if you invest in crypto at the right time, you only make a profit once you sell, and holding onto your crypto for too long could mean you actually miss out on the opportunity you had.
Let's have a look at crypto exit strategies and why you should always have one.
The Risks of Investing in Crypto
Just to be clear before we start, investing in crypto comes with inherent risks as does investing in anything. However, there are a few risks that are specific to investing in crypto.
Exits
While we'll be discussing exit strategies, exiting itself can be difficult. Before investing in crypto, you need to make sure that exiting is possible, even if you believe cryptocurrency is the future of money.
Make sure to check what the requirements are for withdrawals as some exchanges offer limited choices of currencies, high minimum withdrawals, and lengthy processing times.
You'll also want to check with your bank that they also accept cryptocurrency withdrawals.
Basically, do your research before you invest and make sure that there is a way out so that you can put an exit strategy into place.
Regulation
As it stands, crypto is fairly unregulated and this means that it's susceptible to market manipulation and crypto prices are incredibly volatile.
Crypto is fairly new, though, which is why there's a bit of a Wild West/Gold Rush feel to the whole area.
It's new, exciting, and unstable, and if that's something that appeals to you, that's great, but it's something that every investor should be aware of before they dive into investing in crypto.
We can't say this enough, but only ever invest what you can afford to lose. Crypto is not a surefire way to make lots of money, it's a high-risk investment that can lead to high rewards, but these aren't guaranteed.
Security
Cryptocurrencies are incredibly secure due to the underlying technology that they're built on. However, that also means that if your crypto is lost or stolen, there's very little you can do about it because of how secure it is to access.
Cryptocurrency isn't immune to scams, either. While it's very difficult for crypto to be stolen because of the underlying protections, if you willingly transfer your crypto as part of a scam, it's very unlikely that you'll ever get it back.
What Is An Exit Strategy?
An exit strategy is simply your plan for the conditions that need to be met for you to sell your investment. With crypto, you'll buy some crypto, hold onto it for some time, and sell it when you believe the time is right.
An exit strategy is essentially a way to decide what constitutes the “right time” before that time actually arrives. After all, you could easily keep holding onto your crypto waiting for an undefined “right time” and realizing too late that the perfect moment has already passed.
Always Have an Exit Strategy Before Investing
You shouldn't go into any investment without a plan on how it's going to end. After all, the money is only made upon selling.
You should have a strategy going in and a plan of what you're going to do to get out. Different people have different tolerances for risk, but you have to plan how much you're willing to risk ahead of time else you could end up losing.
Similarly, never risk more than you can afford to. In many ways, investing is the same as gambling and you should never play with money you can't afford to lose.
Even if you are happy with bigger risks, you should have an exit strategy that reflects this.
What Are Exit Strategies For?
You need to establish an exit strategy so that you can enjoy the profits when your investment performs well and minimize your losses if it doesn't.
Both types of exit strategies are important because all your gains will be for nothing if you hold onto the investments that ultimately result in losses.
Make sure to plan both inevitabilities because even the safest-sounding investments can go bad.
What Exit Strategies Are There?
It doesn't really matter which metric you use to decide your exit strategy as it's more important to have one.
Here are a few of the most common exit strategies.
Dollar-Cost Average Out
Dollar-cost averaging is the process of regularly investing over a certain period regardless of the price rather than trying to time the investment at exactly the right time.
With dollar-cost average out, the principle is the same but rather than investing, you're selling your crypto.
This doesn't mean that you can't do both. You can buy in intervals and also sell in intervals to reduce the risk of the volatility common in crypto investment.
Market Cycle
The famous adage "buy low, sell high" comes to mind with this strategy. This is one of the more difficult exit strategies because the criteria for exiting are much harder to define and you run the risk of getting it very wrong, especially in the world of crypto which can be so unpredictable.
Naturally, this is also the strategy that can earn you the biggest gains as you'll be looking to buy at the bottom and sell at the top.
For this strategy, you'll need to do a lot of research, looking into every possible factor including the market volume, price action, and any news that could affect the price of your crypto.
Return Amount
For a more measurable and manageable exit strategy, consider setting yourself a fixed target and sticking to it. If the desired amount is reached, you sell regardless.
You have two choices when your return amount is reached: you could either sell off the targeted gains and keep some of your crypto, such as the initial investment, or sell everything and start over with a new investment.
The same is true for a lower limit for losses. You set a lower limit for your losses and once that's reached, you sell to minimize any further losses.
Return Percentage
Last but not least, you could set your exit strategy according to a percentage. This is the same as setting an amount, but you're looking for the price in terms of your return on investment.
In practice, both return percentage and return amount will equate to one another and when you set a return percentage, you'll be setting a return amount and vice-versa.
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How to Make Exit Strategies Work
Firstly, you need to make sure that your exit strategies are right for you. Don't choose exit strategies or set targets that include more risk than you're willing to take on. Similarly, set realistic exit strategies that won't cost you anything that you can't afford.
An exit strategy is only useful if you follow it and while you might be able to make gains by ignoring your exit strategy and holding out for a better price, you can just as easily lose everything by holding onto crypto for too long because you're certain it will keep rising.
Cryptocurrency is looking to become more significant in the future, but even the upward trajectory won't be without its dips.
It can be very tempting (and often encouraged) to hold onto crypto when it's on the rise, especially if you start feeling like it's never going to stop. The reason you should have an exit strategy is so that you can resist the temptation when moments like this arise and you get caught up in the excitement.
Your exit strategy should be made following a lot of research, with a cool head, and before you make any investment. For more help, consider working with a financial advisor that specializes in crypto.
The Cryptocurrencies Set to Explode in 2023
To get started, here are some of the cryptocurrencies that are tipped to do well in 2023. While we aren't saying that you should immediately invest in these, it's a good place to start your research, especially if you're looking for cryptocurrencies with a good outlook.
ALGO
ALGO is the cryptocurrency for the Algorand network created by MIT professor Silvio Micali. This blockchain is similar in many ways to Ethereum but with better transaction processing times.
As the network uses a “pure proof of stake” verification, all holders are given 4-6% APR.
ADA
The Cardano project was founded by one of Ethereum's founding members, Charles Hoskinson, and is another proof-of-stake cryptocurrency that boasts scalability thanks to its "Ouroboros" system.
MANA
The cryptocurrency from the online Web3 game Decentraland is expected to do well this year. The cryptocurrency is used in-game and can be obtained through a marketplace or via the buying and selling of in-game items and NFTs.
ETH
Ethereum famously shifted from proof-of-work mining to proof-of-stake for several reasons including environmental concerns and the world's second-largest cryptocurrency, Ether, is still touted as looking to perform well in 2023.
Of course, don't forget to plan your exit strategy before investing in any of these.
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