The Profit Panic

There’s no greater feeling than when your portfolio balance is increasing almost daily during a bull market. We all love profits. But after a while you feel like you need to do something. You feel as if at any moment the bull run could end. How do you traverse the world of a bull market intelligently so that you balance risk and profit taking?

Boy oh boy – the cryptocurrency market has woken up with a vengeance over the last week. We’ve seen BTC climb rapidly into the $53-55k territory with indications that it’s ready to break out even further in coming weeks/months. As always, when BTC goes, the market goes, so it’s only natural to see a general upward trend for the vast majority of the market. In these cases it’s easy to lose sight of our investor theses and chase gains seemingly limitlessly. I’ve personally been guilty of selling too early or too late, but nothing is worse than missing your window. Before we talk about “The Profit Panic” I’d like to remind everyone of something. No one has ever gone broke taking profits.

The value of any stock or cryptocurrency, in terms of gains and losses, really doesn’t exist until you sell it. Time is a luxury many of us have, so for most projects if you hold them long enough you’re likely to see a profit. However, most of us are not blessed with this kind of patience. When a token increases rapidly over a short period of time, or sees consistent growth over a longer period of time, you’re often left staring at a pretty hefty profit. But what do you do? Do you hold it and wait for more? What happens if FUD occurs or the market shifts? That profit could go away and you’d be left wondering why you didn’t take profit.

This fear of profit loss is known as the “Profit Panic” and leads many of us to make rash decisions, myself included. But don’t worry – here are some ways to navigate the butterflies in your stomach when you’re holding onto profits, especially in a bull market.

Value Targeting

My personally preferred strategy for dealing with profit taking is called value targeting. When I purchase a crypto, especially one I’ll be making multiple purchases of, I have a specific value in mind I’m hoping to see. For me, I’m happy to weather dips and bear periods, because it allows me to buy the projects I like at a discount (obviously). But – when the market swings upwards (especially if you buy dips and dollar cost average), you can quickly find yourself sitting on a lot of profit. The easy, and likely most painful way that most people handle these situations is to just outright sell an asset and hold their profits. Sometimes it works well and the market changes, but more often than not (especially during hot market runs like the one we are in currently) you’ll end up missing out on a lot of growth.

With value targeting, as the market evolves, you assign a reasonable dollar value for a particular position you’re looking for your investment to get to. When your investment reaches or surpasses that value, you remove any value above that amount through profit taking. For example – say you were regularly purchasing ADA and wanted to have a $10,000 position in it. You’re buying it periodically and staking it. You’ve managed to save up 5000 ADA and your cost basis is somewhere in the $1.xx area. It’s August 13, 2021 and the price of ADA has climbed to $2. You’ve hit your $10k target. 10 days later and now ADA is at $2.87 and your portfolio of ADA is worth $14,350. You know at some point ADA will pull back, but you still really like the project. With value targeting we would sell about 1500 ADA and take about $4300 profit (probably pretty close to your initial investment!) off the table, leaving about 3500 ADA left. Now, no matter what, you can’t really lose money on this investment, but you still have a lot of exposure for future growth and continued runs. You can then find other projects or use stablecoins to decide what you’d like to do next without risking that money. The added benefit of staking is that you’re always accruing more, too! I use CAKE as a major part of my investment strategy through Value Targeting. Every time my CAKE value (through staking – usually once a week) exceeds my target amount, I pull out my staked assets that have put me over, and reinvest those elsewhere (all without putting in more money). Sometimes you might take profit early, but it’s always better than taking it late.

Asset Hedging

Many traders strictly adhere to the “moon bagging” approach. This approach basically implies leaving a small quantity in an investment no matter what to cover the “moon” case. This has proven to be wildly lucrative for social tokens like Doge, Shib, and other meme coins. Take out most of your money, but leave in a few bucks to see what happens so that you don’t miss out.

“Moon bagging” is great for fast moving assets, but typically isn’t doing much for you for slower moving plays like most larger projects. In these cases, I like to use an approach called Asset Hedging. It’s not terribly dissimilar to Value Targeting, but has a couple wrinkles that make it different. With Value Targeting, we simply take profit and move it out of the asset and into a stablecoin, fiat, or other investment. With Asset Hedging, we use an asset accrual token (that you can stake) as the place that you take profit into. For most of us, we don’t want to take our profits entirely out of the crypto market. Rather, we’d just like to not see them all completely evaporate when markets change.

To alleviate these concerns we need to find other ways to gain exposure to the asset (in case it pumps further) without holding our profit. Fortunately, the crypto market is cyclical and we can use this to our advantage.

When investing in larger cap tokens, they typically are the hallmark coins of an ecosystem – ADA, ETH, SOL, DOT, etc. In our previous example, if we had over $4k in profit, but wanted to do something else with it rather than leave it in ADA, we can “Asset Hedge” or “roll it downwards”. In this approach, we use the cyclical nature of the market to our advantage by knowing that larger projects move first and smaller projects move faster. Here, we would take profit into a smaller token in the same ecosystem. Because the “new” asset is in the same ecosystem as the original one they will move together. More often than not, these “new” assets are smaller caps than the larger ones. As the larger ones start to move slower, money in the crypto market rolls downward into smaller coins, which leaves you perfectly positioned to capitalize on additional growth without having all of that profit at risk in a single investment.

When the market itself appears to slow down, we can then hedge our assets back up into the main ecosystem plays and leverage their resistance to market swings because of their large market cap. Keeping that money in a different investment within the same ecosystem gives you more exposure to the overall asset class but with a little diversity. Some investors like to take out their entire higher level investment when they hit their value target and hedge downwards with everything but their initial investment.

There are many ways to play a market. When the prices are moving fast it is easy to be overwhelmed and worry about losing profits or missing out on more. With a structured approach you can use the market cycles to your advantage and limit risk without missing out on profits. Check out our article on Bitcoin Dominance to learn more about these market cycles and how to play them.

Justin Mckennon

About Justin Mckennon


Justin McKennon is a Co-Founder of CoinBusters. Justin has BS and MS degrees in electrical engineering and deep background in economic research and software development. Justin specializes in data-driven analytics and frequently works with projects in the DeFi and GameFi spaces across the market.

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