Ride the Lightning

Our game is asymmetric. We let our winners run. The opportunity cost of selling early is worse than booking an actual loss. We need big wins. The math tells us the risk/vol isn’t worth it otherwise.

So we HODL. Diamond Hands.

But at some point you’re gonna need that Lambo. Upgrade the yacht. Fund the kid’s 529 accounts. That means taking profit.

In this week's newsletter, I will give you 4 approaches that you can use to take profit systematically. We’ll work from the worst to the best.

Strategy 1: Ride the Lightning

Some investors think they can time the market. Instinct. Read the order book like tarot cards. When it’s time, I’ll know.

They can't, of course, but it makes them feel alive. Pop a zyn and slam a red bull and Ride The Lightning.

Don't do this. You're going to freak out when things are down bad (they will be). You're going to lose your mind when markets are pumping (the feeling of a 10x or 20x 😍🤤). You will buy high and sell low. You will.

I've done this. You've done this. It never works. Grow up. You need a system.

Strategy 2: Buy and Hold

The best strategy by far for traditional investments is to buy and hold. Buy. Wait 50 years. Sell. Pretty easy.

No taxes, low fees, and decades of compounding returns… it’s the holy grail.

Unfortunately, crypto is far too speculative and volatile for buy and hold. There’s a reason Warren Buffett doesn’t own crypto.

If you're going to buy and hold crypto, put a teeny allocation of BTC in your retirement account. 1%. 2%. The diversification will boost your risk-adjusted returns. Please don’t buy and hold $POPCAT for the long term.

Strategy 3: Set Limit Orders Up Front

Limit orders allow you to set a specific quantity of tokens you want to buy or sell at a given price in the future. If the price hits, your order is executed. Bing bang boom. Profits taken.

I don’t like using limit orders for stop losses. But for profit taking, it’s not the worst idea ever.

Here’s how to set them up at different exchanges: Coinbase, Binance, Uniswap, Jupiter.

Here’s an example. You think some token has huge asymmetric upside, so you buy 10. Next, you would set a limit sell order to sell 3 at 2x the current price. You set another order to sell 2 more at 5x today’s price. You set a third limit order to sell 4 at 20x. As your token rockets thru the ionosphere, you now have built-in profit taking all the way to the moon.

I know what you're thinking, “But if it goes 20x, I'm leaving so much money on the table selling early! My Lambo!? The kids’ tuition!?”

To that I say, "shut up!" Taking profit can be a bitter pill to swallow.

Where to Set Take Profit Price Targets for Limit Orders

I pulled together data from last cycle to define some heuristics to help think through price targets.

I chose 12 coins that each went vertical in the '20-'21 bull run. I looked at the date and price when they started going parabolic (baseline), the height they were able to reach (peak), and the length of time from baseline to peak.

(This sample is dripping with survivorship bias. Don't treat any of this as science or gospel. It’s not even stats. The most important thing is that you set your orders somewhere.)

Here's the coins I selected and their baseline-to-peak returns last cycle. Doge, Solana, and Matic/Polygon are the biggest gainers, each returning well over 50x in just a few months.

Now let’s compare the returns and time duration. The x-axis is the number of months from baseline to peak. The y-axis shows the return multiple. Each dot is a coin. You can see Solana up there at the top right — the one outlier that ripped 80x+ over 10 months.

Not much correlation between x and y, but there is a concentration of durations around 3-5 months from baseline to peak.

There’s also a concentration of peaks between 10x and 20x regardless of the length of the run. Of the 12, only 4 made it above 20x.

Final chart, the x-axis here represents the month that the coin started going vertical and the y-axis is again the returns.

This was right in the thick of COVID and COVID-related stimulus checks, a very different market condition than today. But it is clear that when the market gets hot, it gets VERY hot. There are 3 50x+ examples in January, and June/July have big concentrations of 10x winners.

There are big gains across the calendar, but sometimes the market goes from nutty to NUTTY. When things get hot, don’t ask questions. Buy.

What does this tell us about taking profits?

1. When the markets get hot, you need to be in the game. In the last 12 months we've already seen these patterns again -- SOL, PEPE, BONK, even WIF and BODEN have demonstrated similarly rapid vertical phases before cooling off and retreating a few months later.

2. When things get nutty, begin to take profits no later than 90 days from the start. Be aggressive in your profit taking in months 3-5. Ponzi go up. Ponzi go down.

3. There's something (I have no clue what) between 10x and 20x. Even the highest flyers have a hard time scaling past these levels.

My recommendation is to set up your limit orders to start taking profits at 3-5x, take a ton off the table between 10x and 20x and/or months 3-5 (whichever comes first) to lock in the majority of your gains. Let a little ride for that 20x or 50x. I don’t see any reason not to sell everything if you luck into a 75 bagger.

Note: these multiples and timelines are based on the start of rapid price appreciation, NOT your entry. The coin may go up 75x, but if you bought in a little late and you may only luck into a 5x.

Strategy 4: Dynamic Rebalancing

The best strategy for taking profit is to rebalance your portfolio automatically in a way that considers:

• Your portfolio's current and desired risk profile

• Diversification

• The market (are you bullish or bearish? is the Fed printing again? etc)

If the volatility in your portfolio is above threshold, then you need to de-risk. Take profit.

If you have a mega winner that's up 50x, your diversification is going to be off. Take profit.

If Elon and Trump and Mark Cuban and Roaring Kitty all just tweeted about your coin, then you should be giga-bullish and Ride The Lightning.

To do this across all three dimensions requires math. You may not like math, so I have a spreadsheet for you — use this example to start.

Explainer video is here.

1. Do a File → “Make A Copy”,

2. Update your volatility target (cell D5. I’m aggressive. 35%+. Make cell D9 close to 100%, never over.)

3. Update the instruments to match your coins (row 20, G6:G13)

4. Update the correlation matrix to match your coins, J3:R12 (make sure the formula in row 30 points to your new matrix correctly)

5. Monthly or quarterly, Buy/Sell as needed to match the allocation recommended by the model

Yes, this does require engaging with some spreadsheet math. Do you remember that kid from grade school who always whined, “I’m never going to use these equations in the real world!!”

That kid doesn’t have a lambo.

Portfolio Update

I bought a small bag of $MICHI this week. Michi is a Solana meme coin that broke above $100 million market cap on solid volume.

For whatever reason, “cat coins” are the flavor of the month in meme coin world. There’s lots of competition and chop in the “cat coin” market - Popcat, Mew, Shark Cat, and now Michi are the strongest cohort. I own Shark Cat and now Michi. I took profit and sold my $POPCAT 2 months ago (too early by the way).

Proceeding with caution for now.

Market Vibes