The instability of the cryptocurrency market forces its participants to take a number of preventive measures to save money. Such measure is profit taking. Like other market methods, it has some features that allow achieving the best results. What is the profit taking on cryptocurrencies and how can it help the investor? We will describe in this article!
Suppose an investor invests $ 500 in Bitcoin. Let him use the strategy of long-term investment or the formation of a cryptocurrency portfolio – this is not so important. It is important that after a while Bitcoin grows and the investor is in the black. Let’s say Bitcoin grew by 20%, and investor $ 500 turned into $ 600.
The investor seems to have received $ 100 of net profit. However, the money is in his Bitcoin form, so he does not have actual dollars. The course of Bitcoin, meanwhile, is beginning to be adjusted.
First, it falls by 10%, reducing the investor’s profit, respectively, and then it may fall by 15% and 20%, depriving the investor of profit altogether. It can fall by 30%, and then the investor is at a loss – no less, than the recent profit, because his money is still in bitcoins, and Bitcoin can grow again.
In the above example, the investor should have withdrawn $ 100 when Bitcoin grew. So he would have stayed with $ 100 of net profit, regardless of further market fluctuations. If the market fell, it would be worth waiting for the next round of growth. If the market grew further, it would make sense to once again take profit.
The market can grow and continue to grow – then perhaps it is worth waiting for the maximum peak and then takes profits. What if the market starts to fall and the moment will be lost? What if it is already missed, then fix the profit now or wait for the next growth? These questions concern many.
The fact is that the investor studies his asset in detail, examines its laws, studies the news background, the degree of influence of the news of the cryptocurrency market, and so on.
In fact, he conducts a fundamental analysis. He can use elements of technical analysis — for example, to study rate fluctuations in recent times. Based on these data, he makes a prediction of how high a cryptocurrency can rise, how low it can fall, and when it will happen.
It consists in the fact that the investor withdraws the initial investment as quickly as possible – after reaching the minimum profit. Suppose he invested $ 100. He waits until his profit is 30%, 50%, 100%, 200%, and withdraws his $ 100.
He will choose 30% or 200% – it depends only on how much he considers the minimum acceptable investment for himself. That is, if he believes that $ 30 can be earned, he waits $ 130 on the account and withdraws $ 100. However, usually you won’t earn $ 30, so investors are often waiting for 100% profit.
For example, an investor wants to earn $ 500. He invests $ 100 and waits for the cryptocurrency to grow 5 times. It can fall, grow, fall again – the investor does not respond to fluctuations until the moment he needs. As soon as the amount in cryptocurrency reaches $ 500 – he withdraws it.
Then he can leave $ 400 to himself, invest $ 100 again and wait further. The goal may not be a certain amount, but a certain percentage. For example, an investor sets a goal of 200% of the profit does not touch the asset until it receives 200%.
Bad is the fact that a reasonable framework must be calculated and not mistaken. For example, when investing $ 10, waiting for a profit of $ 10,000 is impractical. When investing $ 100, waiting for $ 1000 is already possible, but not on all cryptocurrencies, and it is necessary to calculate promising cryptocurrencies in this regard.
Here, the investor is not particularly busy choosing the right moment, but takes profits every time it is there. For example, he invests $ 100 in Bitcoin. Bitcoin rises and $ 100 turns into $ 110. The investor withdraws $ 10 and waits on. Bitcoin continues to grow, and the remaining $ 100 again turns into $ 110. The investor withdraws another $ 10 and continues to wait.
The disadvantage is that the investment remains at the same level and brings equally moderate amounts. If he waited, for example, 100% of the profits and left it, then at the next jump, instead of $ 10, he could get $ 20 already. Since it does not wait – only receives $ 10.
As soon as the profit reaches the values set by the investor and requires fixing, it changes the profit in cryptocurrency to profit in dollars (euro, other fiat money) and transfers it from the exchange to a bank card, to electronic payment systems, and so on.
The advantage of this method is that the investor receives reliable, real money, which, unlike cryptocurrency, can pay anywhere.
The disadvantage is, firstly, in the commissions, and secondly, in the complicated procedures of depositing / withdrawing funds from a cryptographic exchanger. If an investor keeps cryptocurrency in the most reasonable way – in wallets, then he will have to make money on the exchange, change them there and withdraw them from the exchange to the card. With frequent withdrawal, he will noticeably lose on commissions.
Cryptobirds tend to crash, delay transactions, and so on, when withdrawing to Fiat, and so with frequent commitments, the investor has a high chance of falling into the number of victims of such a failure.
It means that the profit in one cryptocurrency is transferred to another cryptocurrency, which at this moment seems more promising – for example, it grows or will obviously grow in the near future due to objective reasons (improvement, legalization and others).
When the main asset slows the fall, the investor takes profits, transferring it to another cryptocurrency, which at the same time begins to grow.
The method is good because in this way the investor saves the money earned, and receives additional income on the growing cryptocurrency.
The method is bad in that an investor has to spend time and energy on finding other currencies that are promising at a particular moment, and at different times these may be different currencies.
There are several cryptocurrencies the price of which is based on the price of fiat money, precious metals, and so on. The most famous is the Tether cryptocurrency one coin of which costs exactly $ 1, and this price hardly fluctuates even during very strong drops in the crypto market (Tether fluctuations range from $ 0.9 to $ 1.1).
Accordingly, the transfer of cryptocurrencies into this currency is similar to their conversion into ordinary dollars, only within the framework of the crypto currency. You can take profits in cryptocurrency euros, cryptocurrency gold, silver and other stablecoins in the same way.
The advantage of the method is that the investor practically keeps the money in a stable and reliable (compared to cryptocurrency) dollar, but at the same time he does not have to work with banking systems.
This method does not have any special disadvantages, they all boil down to the risks of cryptocurrency storage, but this is a matter of technical literacy and the security of the investor’s wallets.
Despite the seeming simplicity, the method of profit taking has quite a lot of nuances, features, and approaches. Improper use of them can not only reduce the total profit but also lead to unjustified losses. Therefore, an investor should approach the issue seriously, namely