The crypto markets have been soaring recently. Many people that are invested in cryptocurrencies like bitcoin, ethereum, ripple or dash have multiplied their initial investments in a relatively short timespan. Because of these incredible gains all across the board, I think it is a sensible point in time to spare a thought on when and how to divest from cryptocurrencies into other asset classes.
But first a word on who this article is and who it isn‘t aimed at: This article is not aimed at people who are confident that they can time the market. If you can spot the highs and lows pit pat piffy wing wong wang just do that and don‘t read any further. All the rest of us who cannot anticipate the next antics of the markets do good in thinking about a selling-strategy before the advent of a new bull market forces us into action.
When getting out of an appreciating asset, there are generally two risks: the risk of selling prematurely and missing out on large potential gains as well the risk of selling too late after the bull market has turned around – effectively becoming a bag-holder. Avoiding these risks are two conflicting goals. By reducing your risk of selling your assets prematurely you automatically increase your risk of selling too late. So our selling strategy must balance these two goals in a sensible way.
A strategy in which we sell a certain percentage of the underlying asset everytime the value of the asset doubles is such a strategy. By adjusting the percentage value we sell per duplication-period, we can adjust our exposure to both risks. A very low percentage has a low risk of prematurely selling but a high risk of ending up as a bagholder. A high percentage brings a high risk of premature sell-off and a low risk of having missed out on an abruptly ending bullrun.
I wrote a small web app that let`s you model such a strategy called Continuous Divestment. It let`s you input your start balance of the underlying asset and configure the divestment strategy by entering the sales percentage per period. It shows you the resulting portfolio worth for every period, as well as how much of the asset you have to sell per period to follow your chosen strategy.
Optionally fiat holdings can be entered into the spreadsheet as well. This let`s you view your asset/fiat ratio. Interestingly a sales percentage of 28,5715 % will let the crypto-exposure of your portfolio converge towards 50% independent of where you start from. I bet there is some cool mathematics that will result in this value, if you happen to know about it, please let me know in the comments.