Picture this, bitcoin has just hit its all-time high and is showing no signs of slowing down. Some altcoins have 10xed or more, and you happen to be holding a substantial amount of one or more of these altcoins.
The destination is clear, the moon is clearly in sight, and now that you’re so close, you start to realize that you never took the time to think about the most crucial question in cryptocurrency investing seriously.
When should You sell Your Altcoins?
You fly past the moon, and you panic as you find yourself being pulled back down to earth and watch in horror as all your gains get burned up in the atmosphere of FUD and funny money.
Today I’m going to go over a few metrics you can use to help you plan your own ultimate altcoin exit strategy, regardless of what altcoin you’re holding.
As your fellow astronaut, it’s my mission to help you land on the moon when the day comes.
Before entering the moon simulator, I need to set some ground rules. I am not a financial advisor, and nothing I say during this simulation should be considered financial or investment advice. It is up to you to complete your training on your own time, which means doing your research.
Now, if this is your first time here, Welcome to the shavuna. We do much more than run simulations for aspiring crypto investors. We investigate cryptocurrencies, take you through exchange platforms, deconstruct DEFI protocols, and much more.
If this is the sort of stuff that gets your blood flowing, join our email list below to keep that heart pumping
However, if you like skipping around, I’ve added a table of content to this blog post for you to do just that. I will note that today I do recommend you sit tight and read this one through.
All right, comrades, that’s enough paperwork. Suit up its simulation time.
The Cryptocurrency Market
To build a bulletproof exit strategy, it is crucial to first understand the asset we’re dealing with. This understanding starts with putting everything into context.
The world economy consists of multiple financial markets: housing markets, foreign exchange markets: stock markets, and thousands of others. Almost all these markets follow some kind of visible cycle. It can be a one-year cycle, a four-year cycle, or even a 12-year cycle.
In some cases, these longer cycles contain even smaller cycles that last a few months or even a few weeks.
These cycles can also change over time. They are usually becoming longer as a given market matures. The cryptocurrency market is very young, and that makes it very volatile. This is simply because nobody knows for sure what the actual value of the market is.
Older and more established investors like Warren Buffett hold much of the wealth in financial markets worldwide.
These investors are generally more conservative and less prone to taking risks with their investments, especially when it comes to new markets, which consist of technologies they don’t understand.
This was actually the reason why MasterCard pulled out of facebook’s libra project. CEO aj Bangor said, “when you don’t understand how money gets made, it gets made in ways you don’t like.”
In contrast, younger investors like me and you are a bit more tech-savvy. We know how bitcoin works as well as many of the promising altcoins in the space.
We’re also more prone to taking risks, and many of us have serious hopium addictions when it comes to our favorite altcoins. Not only that but cryptocurrency markets are not restricted to suit and tie traders.
All you need to participate is an internet connection. And that means a lot of inexperienced investors. This makes the cryptocurrency market even more volatile and irrational on a day-to-day basis despite all the daily chaos in the crypto market.
When you step back, you can see a pretty clear market cycle. This cycle seems to last around four years. And consists of a two to three-year bull market followed by a one to two-year bear market, depending on how you draw your indicators.
The cryptocurrency market cycle seems to be caused by the bitcoin halving. If you didn’t already know, the bitcoin block rewards for miners are cut in half every four years.
Assuming demand stays the same, the sudden decrease in supply eventually leads to a spike in bitcoin’s price. Since most altcoins are highly correlated to bitcoin, they also see a massive swing to the upside around that time.
This explosion in value makes it to the media, bringing even more money from experienced and inexperienced investors into cryptocurrency markets.
The most recent halving lead many to believe that we are on the heels of another big move in the crypto market. Some would say we are already in it, and I can see why.
In contrast to the previous cycles, there is more smart money from financial institutions and experienced retail investors in the crypto space than ever before.
This is partly due to government regulators worldwide who have started doing their homework and realize that there is much more to cryptocurrency than twitter hacks or ransomware attacks.
And the cryptocurrency market currently consists of anywhere between six thousand to over seven and a half thousand coins and tokens.
The total market cap of all these assets combined currently stands at around 400 billion dollars. Of course, bitcoin takes the lion’s share of this, with a market cap of about 240 billion dollars at the time of writing.
The cryptocurrency market is relatively small compared to other financial markets and markets for similar assets such as gold. For context, the foreign exchange market is worth roughly 6.6 trillion dollars, while the market cap of gold currently stands around 9 trillion.
Many have interpreted this contrast in markets to be proof that the cryptocurrency market still has a lot of room to grow.
Now that we have a solid grasp of the cryptocurrency market, it’s time to take a closer look at the individual assets inside of it.
As we all know, bitcoin is the first cryptocurrency and remains the largest and most popular by a wide margin. Every other cryptocurrency is consequently referred to as an altcoin.
While this dichotomy is debatable, it is a significant one to keep in mind nonetheless. And here’s why the likelihood that the market cap of any altcoin will be larger than bitcoins anytime soon is very, very low even during the next bull run.
This is for one simple reason. Bitcoin is where most of the smart money from institutional investors and experienced retail investors is going.
You won’t see companies like MicroStrategy or Square buying the dips on altcoins like Chain
link or Vchain any time soon. Even Ethereum is having a hard time getting into the hands of serious investors.
This seems to be partially due to the upcoming release of Ethereum 2.0, which has some large investors like Greyscale, which does hold Ethereum, calling ETH 2.0 a material risk to investment.
Compared to altcoins, bitcoin is much less volatile, and its volatility has been gradually decreasing over the years.
What’s more, is that its price action has a significant influence on altcoins. When bitcoin goes up, altcoins go up, and if bitcoin goes up too quickly, many altcoins tend to see losses in the short term, especially those with a smaller market cap.
Because most of the money invested in altcoins comes from crypto astronauts like you and me who are looking for the quickest path to the moon.
When we see bitcoin taking off, many of us ditch our alts and rush to the bitcoin spaceship, and when bitcoin loses steam and the price drops, everything comes crashing down to earth.
Altcoins tend to see their best gains when bitcoin gradually increases in price or when it’s trading sideways.
This is partly because opportunistic investors get bored with the price action from bitcoin and the other large alts and start inching closer and closer to the deeper and more chaotic waters of what lies beyond the top 10 or 20 altcoins.
These dynamics between bitcoin and altcoins are absolutely critical to understand because your ultimate altcoin exit strategy starts with the awareness that it will be heavily influenced by what bitcoin is doing.
Bitcoin’s own market cap effectively sets the upper limit of where your altcoin could go.
While it’s true that bitcoin’s market cap will likely continue to grow as the bull market marches on. Planning to sell your xrp when it hits one thousand dollars is not a realistic exit strategy.
This is because that would give xrp a market cap of over 50 trillion dollars that’s more than double the size of the entire u.s economy.
If you still insist that this will happen, allow me to insist that you are high on opium.
All right, now you have a sense of how bitcoin’s price action seems to influence altcoins and have also hopefully realized that the market cap of your favorite coin is probably not going to be larger than bitcoins anytime soon.
The next step is to factor in the tokenomics.
If the US dollar was a cryptocurrency, it would have some of the worst tokenomics in the crypto space. It has an inflation rate of around three percent per year.
It has no supply cap and can be created at will by a centralized authority, and most of its circulating supply is held by a minimal amount of people.
This makes it a very poor choice as a long-term investment, and this has prompted one of the most extensive collective exit plans in financial history called cryptocurrency.
It is amazing that almost every crypto coin has its unique tokenomics. What’s more, is that the open-source nature of many of the blockchains these cryptocurrencies are built on makes it easy for anyone to see exactly what is going on with their favorite tokens.
This sort of transparency is refreshing as it’s pretty rare in legacy finance.
However, it also shows us that the cryptocurrency space is not immune to the same sort of corruption and greed found in our current monetary systems.
I’ve lost count of the number of times I’ve come across a crypto project that was promising in every way, only to be let down by its tokenomics.
Many cryptocurrencies have solid development teams with functioning products and platforms that have clearly defined and valuable use cases and even boast partnerships with numerous internationally recognized institutions.
Then you pop open that block explorer, and it’s worse than going through your ex’s phone. Now I’m not going to go through all the elements that make an excellent altcoin.
For the purposes of this article, we are just going to zoom in on the critical tokenomic factors which you need to keep in mind when it comes to planning your ultimate altcoin exit strategy.
The first is token allocation. Every cryptocurrency has its unique token allocation, and a select few had no token allocation. Instead, a genesis block was mined by one or more parties initially without any special token distribution.
This is known as a fair launch and is unfortunately quite rare in the crypto space. Most cryptocurrencies we see today had something called a pre-mine.
This usually involves allocating a fixed amount of a token’s initial or total supply to select parties or causes some of these tokens to go to the founders.
Others go to early investors of the project. Usually, the most significant chunks go towards the ICO and mining or staking rewards for those who will participate in that cryptocurrency’s ecosystem.
When you look at the altcoin, you’re holding, note how these tokens have been allocated in the crypto project’s ICO documentation and then check to see if those tokens have actually been issued in the way that was initially outlined.
You can do this by using a block explorer, which you usually find on your altcoins website. If the altcoin you have is an erc20 token, you can use Etherscan to check what’s going on behind the scenes easily.
Your mission is to figure out which wallets are holding a large number of tokens and whether those could be suddenly sold if the price were to increase significantly.
Hint: It’s safe to assume that tokens allocated to opportunistic venture capitalist firms or angel investors will be some of the first to go.
If you see a single wallet holding more than 10 of a token’s total supply, you might want to reconsider your altcoin pick.
That said, some cryptocurrency projects have vesting schedules for allocated tokens. This means that those tokens given to investors or founders will not be available right away but over time or just at a later date.
The worst example of this is Solana’s vesting schedule which is still the spookiest thing I’ve seen. If you see a vesting schedule like that, you might want to consider selling your tokens sooner rather than later.
Inflation and Total Supply
The second thing to watch out for when it comes to tokenomics is inflation and total supply. Inflation is not necessarily an issue so long as it’s low and so long as you aren’t planning on waiting to sell when you retire.
It’s also important to mention that inflation is used by many projects to incentivize network participation. This means you can sometimes avoid this inflation by staking or delegating your tokens if you plan on holding onto your tokens for some time.
However, the sort of aggressive token inflation that’s used to pay liquidity providers in many DEFI protocols will probably choke the engines on your spaceship before you even get it off the ground.
With these tokens, it is best to follow the wise words of Yearn finance’s creator Andre cronies. “Do not buy it; earn it.”
And speaking of Yearn, the wi-fi token might just be the best example of how important the supply metrics of a token are regarding its price.
Wi-fi, also sometimes called waifu, is one of the few cryptocurrencies with a higher price tag than bitcoin.
The simple explanation for this is that the demand for the token is exponentially greater than its maximum supply of thirty thousand.
I mean, who wouldn’t want to own a token that gives them a say in how one of the best DEFI protocols is run. This small supply is also why wi-fi’s market cap is just 400 million USD.
Not only that, but all wi-fi tokens are in play. No additional wi-fi tokens are waiting to be mined or minted.
Wi-fi also had a pretty fair launch with no pre-mine. Liquidity providers on Yearn Finance earned all tokens. These characteristics have led some to label wi-fi the bitcoin of DEFI, which is why I hold some wi-fi myself.
- Check that your altcoin had a fair launch or at least an equitable pre-mine with a vesting schedule that doesn’t make you run for the hills.
- Make sure that inflation isn’t too high and see if there are ways you can mitigate against it until you decide to sell.
- Be sure to take note of the circulating supply compared to the maximum supply, assuming there is a maximum supply. Otherwise, you might find your tokens suddenly losing value as additional coins start to flood the market to drown out demand.
You need to take one last thing into account to finish planning your ultimate altcoin exit strategy. And it’s what the technicals are saying.
If you’ve ever read an exit strategy article before, you’ll know that most of them rely on technical indicators.
Now, while technical indicators can be handy, their utility declines in the absence of other critical factors such as the ones we’ve outlined in this blog post.
So far, what’s more, is that technical analysis can suggest different trends depending on the time frames you’re using and the way you decide to draw your trend lines.
That said, there are two technical indicators you need to pay attention to when it comes to deciding when to pull out.
The first is bitcoin dominance. Bitcoin dominance is how much of a cryptocurrency’s total market cap is accounted for by bitcoin. Right now, it’s around 60 and seems to have been declining steadily since September 2019, when it was just over 70 percent.
During the 2017 and 2018 bull run, bitcoin dominance fell to just 37. This is important because a large amount of money moving into altcoins is part of why many alts saw their all-time highs during that period.
Assuming this downward trend in bitcoin dominance continues, we may just see another sudden drop in bitcoin dominance in the next year or two.
If this happens, it will once again bring a flood of money into the altcoin space and take many alts to new all-time highs.
Historically big drops in bitcoin dominance have lasted around one to two weeks. Meaning you would have plenty of time to exit during that window if that’s part of your ultimate altcoin exit strategy.
Altcoins Value Against Bitcoin
The second technical indicator to keep in mind is your altcoins value against bitcoin. Most of us are focused on the dollar value of our favorite altcoin and prefer to trade against a stable coin like USDT.
While this may make it easier to keep track of our portfolios, the value of your altcoin in satoshi’s gives you the best indication of whether your cryptocurrency is rising in value relative to other assets in the crypto space.
Let me give you a simple anecdote we’re all familiar with.
Suppose your favorite altcoin has been rising in dollar value, you’re feeling good, and you start to feel the keys of that Lamborghini materializing in your hands.
Then you click over to the rankings and see that other altcoins are making even more impressive gains, and your favorite altcoin is barely keeping up. Maybe even lagging behind.
So, what gives well if you’d taken a closer look at the bitcoin pairing of your altcoin, you would have noticed that even though your altcoin was rising in dollar value, it was actually losing value in satoshis. In contrast, some of those other altcoins had been gaining value in satoshis.
Again the time frame you use to analyze this trend might influence whether it’s going to the upside or the downside.
If you’re lucky, you’ll see a clear trend you can spot on a short to medium-term time frame that will tell you whether your altcoin is valuable in terms of real money or in terms of dirty fiat.
Keeping a close eye on bitcoin dominance and your altcoins trend against bitcoin will help you figure out when is the best time to sell.
Exit Strategy Simulation
Now that we’ve covered all the metrics you need to build your very own ultimate altcoin exit strategy, it’s time to run a simulation.
Suppose there is a cryptocurrency called shavuna coin (coming soon, I promise). Shavuna coin currently has a market cap of 100 million dollars. Meaning it just barely cracks the top 100.
Like other altcoins, it is highly correlated to bitcoin, which currently has a market cap of 300 billion dollars.
Now, I really love the Shavuna coin, but I know it’s not going to be bigger than bitcoin. I also doubt that it’d be bigger than Ethereum, which currently has a market cap of 50 billion dollars.
As such, if it were to go suddenly parabolic, now I know it would probably not be likely to pull off more than 50 times move in price since that would make it as big as Ethereum.
Shavuna coin has an initial supply of 50 million and a maximum supply of 100 million. Each token is currently worth two dollars, and the inflation rate is one million coins per year. Meaning I can wait up to 50 years before Shavuna coin enters uncharted territory.
One hundred of Shavuna coin’s initial supply is currently on the market, and 20 percent of this supply has been reserved for my friend mad mike, who was an angel investor of the project.
However, he’s not able to touch his tokens until January the 1st of next year, so I know it will probably be a good idea to sell before then because I know mad mike is all about that dirty fiat and will dump as soon as he can.
Now, let’s fast forward; it’s christmas eve, December 24th this year; Shavuna coin has already 10xed in price over the last few months. Meaning each token is worth 20, and the market cap is just over 1 billion.
Because of inflation, bitcoin’s market cap is just under 1 trillion, and Ethereum’s is over 500 billion. Even though eth 2.0 still hasn’t been released, Bitcoin dominance saw a sharp drop one week ago, and money is flooding into altcoins.
Meaning I have no more than a week before that trend starts reversing. Shavuna coin pairing with bitcoin could be better. But if I look carefully, I can see a slight uptrend on the one-day time frame, and the Shavuna coin has jumped to almost 24 in the minute that it took me to tell you this.
I think that a 20x from my initial entry is possible, but the reason that a lot of traders are going to sell the Shavuna coin at the psychologically comfortable level of forty dollars. To play it safe, I set a limit order to sell my Shavuna coin at 33.33.
A number that hurts to look at. I go to bed, and then I wake up. It’s christmas day, and my christmas wish has come. Authentic Shavuna coin has hit a high of over 45dollars while I slept before crashing down to 22.
It would have been nice to sell the top, but that’s an impossible task. The price looks bearish. All indicators suggest we’re headed for a massive correction across the board.
I kick back and sip my christmas coffee while I hear mad mike screaming at the top of his lungs from the other side of town.
All it took was to research a bit of strategy and a lot of luck. Now I just have to figure out how the hell I’m going to buy that Lambo without getting choked slammed by taxes.
All alright, folks, that’s all for today; I hope this article helps you plan your ultimate altcoin exit strategy in the upcoming bull market.
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I’ll see you in the next one crypto noughts.