6 min read

📈 The Best Bitcoin Profit Taking Strategy

Struggling with when to sell Bitcoin? We cover the psychology of investing, debunking the buy high, sell low conundrum. Explore automated investing, dollar cost averaging as a sell strategy, and advanced profit-taking methods.
📈 The Best Bitcoin Profit Taking Strategy

If you've been in Bitcoin for a while you've seen your net worth skyrocket and Bitcoin take over other assets as a percent of your net worth

But at what point do you sell?

There's a strong argument for never

If you have the superior asset it's going up forever Laura

Bitcoin is the hardest money ever created and it's going up forever Laura, forever - etc

But you might also want to balance becoming a gigachad billionaire, king of the castle, yachts to the moon with buying a house and having a family (lame)

So how do you do that at the right time to maximize the value of your Bitcoin position?

The Problem to Solve

People are absolute morons when it comes to investing

Everyone wants to buy when the price is high and sell when the price is low

Even though it doesn't make any sense, it's how we've evolved as humans - it's in our psychology

You've seen this with your friends and family

They'll ask you if it's a good time to buy Bitcoin when the price is high

They'll say they're going to buy some when the price goes down

The price crashes hard

They think Bitcoin is dead and they forget about it

The price goes back up, they ask you if it's a good time to buy and the cycle repeats

This emotional cycle fueled by fear keeps people from investing in their futures

That same emotional cycle will make it difficult for you to recognize when to start selling too

The price will be 30% lower than the cycle top you were promised by all the models and podcasters

You'll think there's one last leg up

And then the latest altcoin ponzi scheme levered to the tits will tank the entire market

Profit Taking (Do it Yourself)

The solution to breaking out of this cycle is to automate your investments

We've covered this on the channel using exchange APIs like Coinbase and Gemini

Automated Trading with Coinbase API

To learn more about the benefits of automated investing, read I Will Teach You to Be Rich by Ramit Sethi

If we emotionally invest we'll buy high and sell low which will keep us poor forever

Instead we need to set a predictable schedule that will help us steadily grow our wealth over time.

Dollar cost averaging (DCA) is the lowest risk investing strategy because it removes all emotion from the process

We've talked about DCA as a buy strategy but never as a sell strategy

There are 3 steps:

1) Identify the amount you want to sell

2) Identify your time horizon

3) Execute the trades

To help identify the amount you want to sell: create a target allocation for your Bitcoin

Example (not financial advice): You have $100,000 and want 50% of your portfolio to be in Bitcoin and 50% to be in cash

You currently have $60,000 of Bitcoin and $40,000 in cash

In this case the amount you want to sell would be around $10,000 (your individual tax situation might change this number slightly)

Next identify the time horizon

If you need the money in 6 months, you might set the time horizon to 3 months (12 weeks) and plan to sell once a week

Finally you'll execute the tradesIn this case you'd be selling $10,000/12 = $833 every week

The benefit of selling over this time horizon is that you might find that you've hit your target allocation before the 12 weeks is up

Or you might find that even after 12 weeks you're not exactly where you planned to be and you still need to sell more

Either way you get a ton of flexibility with this method because you can stop and reassess at any point

You can stop worrying about selling at the top (which is impossible to do reliably) because you know you've spread your risk over many trades

Advanced Profit Taking (Do it Yourself)

But some critics of dollar cost averaging will tell you that it's too dumb of a strategy

Critics would say you don't want to buy the same amount all the time

It would be better to buy more when prices are low and buy less or take profits when prices are high

But you don't want to get swept up in the emotion of day trading - that's how to lose all your money

Instead, we want to trade unemotionally

To solve this problem we need to rely on indicators that can give us an advantage in our dollar cost averaging

On the channel we've done this with the fear and greed index and indicators from glassnode like MVRV data

DCA with Fear and Greed on Coinbase

When we combine that data with automated trading APIs we can outperform a "dumb" DCA strategy

These strategies are very basic and only include single indicators

DCA with MVRV analysis

And you need to set the thresholds and the amounts you're buying and selling yourself

In our examples we made up random thresholds for buying and selling

There wasn't any data behind our descision making other than very basic backtesting

The problem with this strategy is that no indicator is perfect forever

MVRV and the fear and greed index backtest well and have been predictive up until now.

But like all other models: there's no guarantee they will predict well going forward

Over long periods of time every indicator loses its alpha (or its "edge" over the market)

Advanced Profit Taking (Done for You)

"All models are wrong, but some are useful" - George E. P. Box

On the done with you videos above I've gotten a lot of questions about how to pick the right thresholds and how much to buy or sell

To be clear: I have no idea

It depends on your risk tolerance and your personal financial situation and goals

All I can do is give you more data to help you make a decision

A few weeks ago a team that saw those videos reached out to me

They have a product called AlphaSquared whose goal is to solve this exact problem

They want to give you more data so that instead of investing 10% of your paycheck each month, you can take advantage of market data to invest that 10% at more favorable prices

Instead of relying on a single indicator AlphaSquared takes over 5000 data points and combines them into a 0-100 daily risk number

Example of AlphaSquared Risk Number

The goal of this model is to classify the current risk in the market to help you enhance your DCA

They even have built in testing to show you how your strategy performs under different assumptions

Custom Strategy Creation

If you want to learn more about AlphaSquared's methodology you can check it out on their website here

The first two weeks are free with full functionality - it's as easy as logging in.

And if you like the service you can use code LEVELUP for 15% off all paid plans

I'm excited to include indicators like this into the Coinbase API wrapper I built so we can get better automated trading

Stay tuned for more updates on the Coinbase API - I'm currently rewriting it to support Coinbases's new authentication methods

DM me on Twitter or join the Discord [it's new - there's no one in it right now] if you have any questions

See you guys next week