For the sake of this example I am using Coinbase (not Coinbase Pro), it is not the only exchange and I am not necessarily endorsing them – in fact I am going to write something more soon on different exchanges especially for newbies. In this post I am going to explain a method I use when I have seen the crypto value crash after making a purchase. For the example I have used TEZOs, but that is an arbitrary choice and chosen only because it is quite a volatile currency of low value which creates easy numbers. I have rounded up Coinbase’s commission rate of 1.49% to 1.5% as it adds some extra contingency – please note there is a minimum purchase amount through their own wallet to get the 1.49%, so please make sure you check the criteria. This is one of the reasons I have used £200.00. Finally I have used Excel for the calculations which I have screenshot to illustrate.
Incidentally always research your purchases to try to avoid the kind of situation I am describing here. This article is for those already in the situation and please note I am not advocating adding additional funds. In the same way as gambling an investor should cap the amount they are willing to risk on the basis they might lose it all!
- preamble over!
So you have gone and done it. You have made an investment and the price has plunged. Your wallet is showing massive losses and your chest tightens as panic begins to settle in… should I sell and cut my losses?
When I was younger I used to play a computer game called Patrician III and although I never really got on with it in terms of city development and increasing my civic position, but I did learn some rudiments to trading that I am now applying to my crypto methodology in the event of a poorly judged purchase. The key is not to panic and sell, but to wait for the price to bottom out and then BUY and use the lower price to leverage the higher price downwards. In the game I was buying spices and if they were overpriced I waited until I could acquire more for a lower price to reduce my average spend and drive me back into profitability.
Now I use the same principles to buy and sell crypto.
The key is to only invest half of your fund* in a process I would like to call halving – not to be confused with bitcoin halving. The second half of the fund is then used as a bailout. Let me explain further.
* in this context half means keeping the same amount back in your wallet. So if you invest £200.00 retain £200.00 in your wallet). Of course you may have other ongoing investments funded from other resources in your wallet.
So now you are in a position where you have invested let’s say £200.00 in TEZOs and you have set up your spreadsheet to calculate your minimum resale price as follows. Please note if you use Coinbase you need a shift of just over 3% to break into the profit zone. I have not included the formulas I used but explained the calculation process. The beauty of such a spreadsheet is that once it is set up you can toggle just two figures, namely the Unit Price that you made your original purchase for (shown below as £2.16) and the Resell Price (shown below arbitrarily at £204.00) to work out your break-even point and where profit starts Please be aware though that the shown price on Coinbase is not the achievable price! I got caught out once – I will deal with this in another article about Coinbase in the near future!)
So you have made a purchase and you are watching your TEZOs price and just waiting for it to hit £2.24 (if you toggle you will find profit starts at a bit less). When using Coinbase always watch the Currency Balance figure at the bottom of the Buy / Sell Convert box and NEVER, NEVER, NEVER SELL ALL.
Then to your chagrin the price goes down.
£2.14, £2.10… “Ok, it might rally…”
£2.04, £1.99… “Oh no my £200.00 is now worth £181.50. I have lost almost 10% and it’s only getting worse…”
£1.82, £1.80… “£164.17 – this is a disaster!”
You may be tempted to sell, but hold your nerve.
Some crypto currencies are better than others and TEZOs aren’t going away. They use an innovative protocol even if it lacks real world application at this time. This is the time to use the second half of your fund. For the example let’s say The TEZOs price goes down to £1.78 and your figures for this purchase only will look like this…
Based on a small profit of £0.94 the resell price needs to be £1.84. Don’t sell then. Wait. In this scenario wait until the TEZOs value increases to £1.95. You are then presented with three positive scenarios.
1) You can just sell your Second Purchase Crypto –
For a £200.00 investment a return of £12.59 or 6.29% is very good, but remember this won’t make any difference to the overspend first time round.
2) Profit directly from the Second Purchase and use it to leverage the first purchase.
Now here is the key. The plan is to recover some of your losses. Still take out the £204.00 to realise the £0.94 profit. Remember this is your halving fund. It doesn’t exist to release big profits. So you will want to get it back into your halving reserve as soon as possible to use again… just in case.
The result is that what you don’t take back (and remember Coinbase take a big chunk) generates a small “surplus” as follows:
So you have made a small profit but here comes the bit that matters…
By taking only a small profit the resell price for making a profit has reduced from £2.24 to £2.10 which makes the chances of reaching profitability much higher. This is where you need to decide whether to take the bigger profit from one sale and leave the initial purchase overpriced or whether to use it to leverage a lower profitability price for the initial purchase.
3) Use the reduced price to leverage a better sale of all the TEZOs
Using the same principles as above the figures would look like this.
So to reach the point of profit – albeit a small one (£0.89) the resell price has drastically reduced to £2.02 and remember the whole point is the higher it goes above that the more profit will be yielded. Using these figures it will be approx. £2.00 per £0.01 increase on the crypto value. So it might be worth holding on and if you have TEZOS remember Coinbase stake them for you anyway the longer you hold them.
Of course you may wish to retain some Tezos anyway in which case draw the profit and leave a residue. I am sure more experienced people than I have other techniques that can help
The whole point of this post especially for newbies, but probably for everybody, is not to panic if your crypto price suddenly crashes. Hope it helps :)
Whoever you are and wherever you are on your journey good luck!!!