Preparing for the bull

Monday 30 November 2015

Buy low, sell high. It’s simple in theory. Yet so many people get it the wrong way round.

Bitcoin has enjoyed a renewed surge in price and volume recently, piquing interest that maybe there’s another major rally coming. Bitcoin’s short history has been littered with bubbles, and it’s entirely possible that it will happen again. Even if it doesn’t and the rise it slower and more measured, it raises some of the same questions for anyone who wants to lock in some profits.

If you’ve been buying bitcoin over the last year, when prices bottomed out in the $200s and stayed there for many months, you may be wondering at what point you should start selling. Accomplished traders will have their own ideas about that, and may just know enough to read the signals the market’s sending. For the rest of us mortals, it’s not so straightforward.

Moon

Is it time yet?

The reality is that trading is hard. Profitable traders have generally trained for a long time, made plenty of mistakes and lost a lot of money along the way. Anecdotally, something like 80-90 percent of day traders lose money. So if you’re sat on a stash of BTC bought in the $200s, and you’re already looking at a decent profit on paper, what’s your next move?

A few suggestions

Here are some ideas for taking (some of) the stress out of deciding when to buy and sell (not financial advice, trade at your own risk, yadda yadda). The problem is that it can be an emotional business. Panic buying and selling can make a mess of your profits, and undermine months of discipline accumulating coins at a decent price.

1. Take the emotion out of it. FOMO (fear of missing out) is not your friend. Create a plan as early as possible, before any further rise clouds your judgment. Set some targets based on how many bitcoins you have and what sort of profit you’re looking for, bearing in mind that those targets may not be met if they’re too ambitious. The numbers involved will depend on your timeframe and appetite for risk. Then stick to it.

2. Sell half on a double. It may not win you as stellar profits as if you held everything to the very top of the bubble, but that’s a very difficult and risky one to time. Selling half of your bitcoins when their average price has doubled is a safe way to de-risk. For example, anyone who bought a couple of months back around $250 and sold half on the recent spike to $500 would have recouped their original outlay in fiat, meaning they now held their bitcoins effectively for free. Selling a third on a tripling of price is riskier but, of course, more profitable.

3. Set buy and sell points on the way up and down. You don’t know how high the price will go, or when it will come back down. A way around this is to sell a fixed percentage at certain milestones. For example, if you have 10 BTC you could sell 10% every $100 rise. In practice that might be 1 BTC at $400, 0.9 BTC (10% of what’s left) at $500, 0.81 BTC at $600, and so on. That way, you never sell everything. It also means you’re in a position to buy again on the way down, should you want to. Perhaps you choose to buy at a price $100 or $200 below each point at which you sold a tranche.

4. Anticipate the crash. Warren Buffett famously said, ‘Be fearful when others are greedy and greedy when others are fearful.’ There’s a point at which a kind of mania overtakes the market. Buyers enter into a collective delusion that the price cannot fall. It’s the same with just about any speculative bubble. Often, the final stages are marked by a near-vertical rise in price, as much as 25-30% in a day. If that happens, it’s almost certainly time to bail - and don’t try to time the top. Just get out, because the crash will be as brutal as the rise was spectacular. 

Any other ideas for maximising profits and minimising risk? Let us know!


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