Getting rich from the crypto rally? Here’s how to lock in gains and avoid a crash.

Christmas came early for crypto investors.

Ever since Donald Trump’s victory in the presidential election, cryptocurrency markets have been ebullient. Bitcoin, the crypto poster child, has continuously hit new highs this month, sending its price within striking distance of $100,000.

If you’ve been lucky enough to see some of these returns, you might also be worried about an impending crash, as crypto prices tend to be volatile.

While it’s common in crypto circles to glorify “HODLing” or “holding on for dear life” and resist the urge to sell your positions, this can prove to be an imprudent strategy.

Take the story of Glauber Contessoto, for example. The 37-year-old crypto trader became a Dogecoin millionaire in 2021 after his initial $250,000 investment in Dogecoin ballooned in just three months. Then things turned south.

“At the very top, my Dogecoin was worth $3 million. And then after that, the bear market came, and crypto in general dipped down,” Contesso told B-17 in an interview. “I saw my portfolio go from $3 million all the way back down to about $200,000.”

With crypto assets enjoying another rally, Contessoto says he plans to approach things differently this time, taking profits earlier and diversifying. These are common strategies for investors to lock in gains and reduce the risk of losing their money if prices crash.

Here are some ways experts recommend reducing risks after a big run-up.

Profit-taking strategies

First, have a plan for getting out of an asset.

It’s important to have an exit strategy to minimize potential losses, especially with a risky asset class such as cryptocurrency. According to Fidelity Investments, it’s never too early to start thinking about one. While an exit strategy will be tailored to individual investor risk tolerance and preference, there are a few general guidelines.

When it comes to realizing gains, have a rough idea of how much money you want to make from your cryptocurrency investment, according to the cryptocurrency platform Digital Surge. The best way to realize gains is to start taking profits incrementally once your asset has appreciated to a certain level. For example, you could follow a rule such as taking 5% of profits for every 25% increase in price.

Don’t underestimate how volatile the crypto market is. One common strategy among crypto investors who have seen significant price appreciation is to at least take profits in the amount of your initial investment.

Set up stop-losses

Nobody likes to think about losing money, but having a plan for when your investment isn’t performing well is important for good portfolio management.

Consider setting up a stop-loss to automatically cash out of your position if your cryptocurrency falls below a certain price, saving you from the hassle of constantly monitoring the price of your crypto assets. These can be a fixed price or can trail your investment’s price gains by a certain percentage amount.

Diversify

Your investing strategy will depend on your risk tolerance, but one way to lower downside risk is to spread your money across a number of assets. Contessoto has his entire portfolio in various cryptocurrencies, but even that is a very risky approach. Cannon doesn’t advise following in his footsteps: “Even if you’re a 100% believer, just having your entire net worth in one asset class is risky.”

“If they have their entire net worth tied up in cryptocurrency, I believe that they should diversify,” Cannon added. He suggests stock-market index funds as a starting point to derisk a cryptocurrency-heavy portfolio.

Especially with meme coins like Dogecoin, seemingly arbitrary events can trigger massive swings in cryptocurrency prices, making diversification all the more necessary. In 2021, the Dogecoin rally was fueled largely in part by Elon Musk’s tweets supporting the cryptocurrency. And recently, Dogecoin spiked 15% after news broke of Elon Musk’s appointment as co-head of the Department of Government Efficiency.

At the end of the day, Contessoto embraces the volatility that comes with investing in Dogecoin and other meme coins. After all, it’s pretty unlikely that you’ll be able to quadruple your initial investment and become a millionaire in just a few months if you buy a more traditional, stable asset.

Don’t take Contessoto’s strategy as financial advice, though. It’s easy to glamorize the success stories, but there’s no doubt that investing in cryptocurrency is risky — especially when it comes to meme coins.

“These things are super high risk,” Contessoto said. “They hit and you make life-changing money, but when they don’t, you lose everything.”