Crypto Profit Taking Strategies

by ykliu

I’ve been holding onto some crypto for a while now, but never thought about a good way to take profits. So here’s my first attempt to try to figure it out a systematic way to take profits.

Description of Methodology:

The profit taking method I chose is to “take X% of profits for every Y% increase in price”. Simple spreadsheet function were used.

I made five hypothetical “profit taking” portfolios where 0%, 1%, 2%, 5% and 10% profits are taken for every 20% increase in price, and tracked the net value of each of those scenarios until the “0% profit taking” portfolio (i.e. holding) hit ~1000% profit (this ended up being 14 cycles of 20% growth, you can think of these as somewhat related to time, as prices take time to grow).

Then, I simulated a 30%, 50% and 80% market crash at each point of the cycles of all 5 portfolios to get how much value you would have left.

Finally, I calculated the % Performance of taking each 4 profit taking strategy relative to not taking profit at all.

Results:

Below is the plot for a simulated 30% correction. Each colored line represents a profit taking strategy (1%, 2%, 5%, 10% profit taking for every 20% increase in price). Vertical (Y) axis is the Performance of the profit taking strategy relative to not taking profits at all. Horizontal (X) axis is the hypothetical growth of a portfolio:

Note that a Performance higher than 0% indicates that this strategy worked better than not taking profits. They way I interpret this is that IF my asset can only increase ~200% in value, and I expect a ~30% crash, then taking more profits will be beneficial. However if the assets grows past ~300% then I sill start losing money by taking profits.

Below is the same calculations for a 50% and 80% simulated correction.

You can see that the higher the correction, the more profit taking is beneficial. At an 80% correction (not unheard of in crypto), profit taking is almost always beneficial in up to 1100% growth.

Examples:

– Highly risky investment (80% potential correction): can be applicable to many small cap alt coins. In this case I expect a high risk of a large (80%) correction. Here, I think one conclusion is that profit taking ALWAYS helps, assuming the assets corrects. I may even choose to take the more aggressive 10% profit taking strategy if I don’t expect to get more than 1000% returns on my investment.

– Lower risk investment (30% correction): Let’s say BTC is a ‘lower risk’ investment with 30% correction potential in my timeframe of investment. Here it is tricky, because you can see that if BTC grows more than ~300%, no amount of profit taking will beat not taking any profits. This may be a case for everyone to HODL. However, if for some reason BTC won’t grow more than 300% in your investment timeframe, you the plots indicate that taking some profits will benefit you in case of a crash.

Unfortunately I don’t have a perfect formula for profit taking. However, I think I learned the following from this exercise:

  1. Set expectations on the growth potential within a desired timeframe for investments.
  2. Estimate potential risks (size of correction).
  3. Disciplined profit taking can help you increase performance assuming you can estimate the above 2.

EDIT 1: Based on the comments, I just wanted to point out that this analysis does not account for timeframe. If you’d like to hold for 50 years, or hold for future generations, that’s a perfectly good strategy. In such long timeframes, your expected returns may be way above 10000% in which case profit taking is less likely to benefit. Added more sections.

Let me know what you think, and happy to have anyone with more expertise in this area to chime in.

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