It’s officially time to talk about an exit strategy for this bull market. According to one of my favourite bitcoin charts (the stock to flow ratio), bitcoin is supposed to be somewhere around $100k USD right now. Needless to say, it is not! That’s okay, things are a little behind schedule, but as far as on-chain fundamentals go, all signs point to a continuation of this bull market for at least a couple more months.
Seeing how my portfolio is made up of 90+% bitcoin, it is really the only coin I am looking to exit out of in the short (12 months) term to repurchase at a lower price. In this letter, I’m going to be discussing when and how I think I will do that.
Why Am I Selling?
I am planning on selling because there seems to be a reliable quadrennial (4 year) pattern manifesting in bitcoin’s price charts. I think the trend is so reliable, that I am willing to put money on the line to test the hypothesis. If I am right, then I will end up with more bitcoin than what I started with.
In theory, I will be able to sell bitcoin for USDT, wait 12-18 months, and buy more bitcoin at a lower price. While I wait, I can lend my USDT to Crypto.com and earn interest. To be clear, it is not necessary to have an exit strategy if your original investment plan is to HODL for 5-10 years.
Let’s dig into my Exit Strategy!
My Exit Strategy
I will definitely be releasing another newsletter later this year, or early 2022 to indicate when I am going to sell. Come November/December/January, I will be monitoring the market very closely and checking the 3 signals I’ve outlined below. I’ve taken on a considerable amount of leverage in order to benefit from the bull market, so I will be looking to de-leverage my positions and pay off some debt.
I plan to sell something like 25% of my holdings, concrete numbers are difficult to determine at this time. The situation I don’t want to find myself in, is I sell, and everything keeps on going up because for whatever reason, this bull-cycle is not like the previous ones.
So if I sell 25% of my holdings, pay off my debt, and then keep the rest of the USDT for a rainy day, then I can sit happy knowing that I am once again debt-free, and have a little cash for my emergency stash I estimate 10% of my holdings will pay off my debts, and 15% will be the profit that can be reinvested when I perceive there to be a new bottom.
To be clear, the only reason why I would sell bitcoin, is to deleverage and buy back in at a lower price. I know this is trying to time the market, which I don’t do on any regular day/week/month. The difference here is I am trying to time a macro-event that plays out on a quadrennial timeline. There is a little less guesswork and a little more analysis that goes into timing the market on a 4 year timeline, rather than a 4 hour, 4 day, or 4 week span. Here is the rough plan.
My Selling Strategy
- When I decide there is a top to the market I will start to dollar cost average OUT of bitcoin. This way I can be sure to get a set of good sell prices, rather than a single sell price. I will plan to dollar-cost-average out of 25% of my holdings.
- I will pay off any/all debts I owe to exchanges/banks
- I may short the market when I am sure we are on the way down and the blow-of-the-top event has occurred. This should be a way to make a quick buck depending on the size of my short. This will be risky. I’ve already lost $10k this cycle on a long that was liquidated. I’ll be sure to carry my lessons through if I end up shorting bitcoin.
- I will hold the USDT and earn a yield on it in the short term
- I will reinvest the USDT into bitcoin 8-12 months after the blow-off-the-top event and dollar cost average back into bitcoin
- I may take a small chunk of my earnings and invest in altcoin projects that I perceive to be of value
The Blow of the Top Event
What is a “blow of the top event”? Naturally, I turn to Investopedia for an in-depth definition and explainer. At the end of every bitcoin bull cycle, there has been a blow-off-the-top event. That’s not to say that there will be one this time, but I’m betting there is, and this is what I am looking for as a sell signal.
Leading up to the blow-off-the-top event there are a number of key metrics and factors at play.
Supply Squeeze (Shortage of Bitcoin on the Market)
New Market Participants (Influx of New-Coiners)
Hype/Euphoria (General Euphoria and Over Exaggeration of Buying Opportunity)
Supply Squeeze
We are already seeing the makings of a supply squeeze. In plain English, a supply squeeze is when there is less bitcoin to be bought on the market. Less bitcoin and more demand typically means an increase in price. A supply squeeze is usually what comes first in a blow-off-the-top event as it preempts new participants and hype.
Notable personalities within the bitcoin space such as Robert Breedlove, Dan Held, Preston Pysch, and Lyn Alden have all advocated for the strategy of hodling bitcoin. Hodling typically results in less bitcoin on the market to be sold. As a result, we’ve seen a very strong base of hodlers building up over the last 3 years. Now we get to see which of those new hodlers really have diamond hands1.
Eventually, all this accumulation taking place at all levels of the market (bitcoin whales and minnows alike) results in less bitcoin being available on the market. At this point simply supply and demand economics takes over and leads to the steady increase in the price of bitcoin. The other two factors (NewCoiners and Hype) will amplify the demand and we get a perfect storm to manifest a blow-off-the-top event.
New Market Participants
I learned a new term this week. That term is Veblen Good. Investopedia will tell us the following.
A Veblen good is a good for which demand increases as the price increases, because of its exclusive nature and appeal as a status symbol
For whatever reason, I have more friends, family, and strangers contact me and ask me if now is a good time to buy bitcoin when bitcoin is in the middle of setting new all-time highs. This is counter-intuitive because you would think people want to get the best deal for the bitcoin they’re buying. More bang for their buck, so to speak. A Veblen good gives us the exact insight we need to understand this strange market behaviour.
The higher the price of bitcoin, the more trust there is in the enterprise in general. People see less risk in the asset because of how large it has grown. I still think it’s a fallacy to analyze bitcoin’s risk purely on its price, but at least I now have a conceptual framework to analyze the counterintuitive behaviour I see flooding into my inbox.
At the end of the day, these new market participants are from all social classes, from all corners of the world. One of the things that push bitcoin up faster though is large new participants on the scale of private, and public enterprise, and now apparently nation-states. Bitcoin is finally large enough, with deep enough liquidity to handle billion-dollar orders. This is very enticing for large corporations and insurance companies as they can now play in this brand new market.
This is exactly what we saw leading up to the pique in mid-April 2021. For the latter half of 2020 and the first three months of 2021, we saw several notable corporations take their first step into Bitcoin. These new actors squeezed the supply, created a ton of hype, and pressured market actors that were on the fence to pull the trigger.
Hype, Euphoria, and Over-Exaggeration
I will always think that buying bitcoin is a great investment. No matter when you buy it. The caveat is that you need to have a long time horizon. Too many people jump into bitcoin at the end of its bull run because they see the price skyrocketing. Little do they know that they are buying the top of the market and the price will soon crash by 20% or more.
They will have to wait many months or a couple of years to get back their initial investment. This is fine if it was your original intent, but too often I see this investment decision born out of hype and euphoria, rather than a calculated long-term investment strategy.
The last phase of the bull market is categorized by mass hysteria, tons of FUD, and media frenzy on mainstream channels. When every news station starts covering bitcoin and the massive gains that occurred recently, this is when I know to be a little cautious.
Be fearful when others are greedy and greedy when others are fearful — Warren Buffett
Exit Strategy Parting Thoughts
If you don’t already have an exit strategy, now is the time to start making one. It is good to have one regardless of where we are in the bull or bear market. If you had to sell, how much would you sell? Why would you sell? On what exchange? Do you need to move bitcoin to the exchange to sell it? What exchange is going to charge you the least fees? What happens if that exchange goes down during a period of high volatility and you cannot sell?
An exit strategy is a little more complicated than just hitting that sell button. A lot of thought goes into it, and if done right, you can really set your portfolio up nicely.
Do You Need an Exit Strategy?
All that being said, there is nothing wrong with HODLing through the bear market. I sold a bit to pay off my student loans in 2017, but I kept the majority of my holdings throughout the entire bear market in 2018-2020. If you don’t think you can handle the pressure or the stress of timing the market, then don’t. It’s probably not worth it, and there is a higher likelihood of you feeling dissatisfied with your decisions.
Whatever you choose, I wish you luck, and I am more than happy to discuss your own exit strategy should you need help with it.
Regards,
Keegan