ALGO Accumulation & the Importance of Exit Strategies
Learn strategies to accumulate ALGO to position yourself to be a big winner during the next bull run.
Welcome back to the Club, gov!
Algorand and its native token, ALGO, are both poised to be one of the next blue-chip blockchains and digital assets.
But I’ve seen many govs get caught up in the hype of other projects (ASAs and NFTs) and lose money because they overinvested in them at the expense of underinvesting in ALGO.
In fact, this is one of the biggest mistakes Algorand investors can make.
Getting caught up in the hype around other assets that could potentially moon while forgetting that ALGO is Algorand’s most likely asset to moon.
After making this mistake a couple of times this year, I realized an Algorand portfolio should always be ALGO top-heavy, and our goal as investors should be to accumulate as much ALGO as possible before the next bull run.
Don’t get me wrong – this doesn’t mean you shouldn’t invest in other projects in the ecosystem.
Sometimes NFTS and ASAs can appreciate in value faster than ALGO, and there are benefits to jumping on a train that’s moving faster. However, you should avoid going all in on any one project while working to preserve and grow your ALGO.
In today’s newsletter, we’ll review the many different strategies to accumulate ALGO, the risks associated with them, and how to best deploy them.
But before we dive into the different ways to accumulate ALGO, let’s review exit strategies because they’re the key to everything you’re about to learn.
Let me explain why.
Mitigate Risk with an Exit Strategy
If you’ve been a member of the Club for a while, you know we’re obsessed with designing and executing plans (i.e., Governance Strategy Guides), and one of the biggest components of our plans center around entry and exit points. No matter what we’re investing in – liquidity pools, ASAs, NFTs – we decide on our ideal entry and exit prices to protect our investments from ourselves.
However, it’s easy to get caught up in the hype and “HODL” culture of crypto and forget to take profits. Designing an exit strategy helps you avoid falling victim to this mistake time and time again because it forces you to develop a profit-taking strategy.
However, a profit-taking strategy only works if it's realistic and you have the discipline to stick to it.
And trust me, you need to force yourself to take profits because HODLing is your worst enemy. It’s that voice in the back of your head that tells you to wait just one more week, month, or quarter because your 5x can become a 10x thoon.
But don’t forget the wise words of Bernie Sanders:
HODLing isn’t an investment strategy, gov. It’s a meme that will get you rekt’d time and time again.
And let me tell you something else.
Those who scoff at a 5x return because it could have been a 10x most likely didn’t take profits because they were waiting for their 10x to become a 20x. In other words: they’re not the investors to learn from.
This mentality feeds into the two worries most crypto investors have: they’ll sell too soon and be mocked or the price will never come back down. First things first, making money is never something to be ashamed of – let’s get that straight.
Second of all: no market goes up forever. This worry around selling the top and never getting back in feeds directly into the HODL mentality.
And lastly, you can avoid missing out on bigger gains by layering out of your position. The same way you can dollar-cost-average (DCA) into a position, you can DCA out of a position by setting price targets.
There are a few ways to determine your price targets. However, for the sake of not getting too technical, here’s a general rule of thumb I follow due to its simplicity:
First Price Target: 2x on investment to recoup original investment
Second Price Target: 3x - 5x on investment, but retain at least 20% of position
Last Price Target: 10x investment or more
I call the last one my moonbag, and always keep one packed.
I validate these price targets using fundamental and technical analyses to ensure my price targets are realistic as well as get a sense of timing around when they could be achieved.
It’s important to understand that you can always reinvest in a project after you take profits by selling on major pumps and using dips and cycle bottoms to rebuild your position.
Okay, now let’s review how to do this across a few different tactics.
Accumulation Technique #1: Trading ALGO
I have a confession, gov…I sold some ALGO this year.
When I realized that we were in the beginning stages of a major market downturn or a Bear Market in February, I decided to rebalance my portfolio and sell 2,000A for 2,000 USDC. You see, I typically keep 10 - 15% of my portfolio in stablecoins, but after recent price action I was underweight.
So, I stuck to my plan, remained disciplined, and took some profits.
And recently, I swapped that 2,000 USDC for 8,000A, earning a 4x on my original position.
The point of this story is not to brag, but instead to show you how important it is to take profits during bull markets. If you don’t take profits and HODL all the way down, you’re doing yourself a disservice.
So, if you suffer from HODL-itis, what can you do to change your mindset?
There are two main ways I force myself not to HODL:
Setting realistic price targets in bull markets: An example of this would’ve been $1, $2.50, and $5 ALGO in the last bull market. Sure, the last one never hit (hence the “moonbag” moniker), but the second one was pretty darn close to November high.
Allocating a portion of portfolio to stablecoins: I’ve found that aiming for 10 - 20% is a good way to make sure you take some profits along the way.
Once I started following these two principles and worked to change my mindset, I began to stack up ALGO quicker and more consistently.
Accumulation Technique #2: ASA Investing
Investing in ASAs is one of the riskiest investments you can make – and I don’t mean in just crypto.
Why?
Because an ASA’s success is dependent on three key factors:
The success of Algorand
Well thought out tokenomics
Their value exchange (i.e., real yield or utility)
While we’re all believers in the potential of Algorand, there isn’t a guarantee that it will be successful from a price action perspective and user adoption standpoint. If a project has no users, it has no revenue and will eventually close down – making its token useless.
But let’s assume Algorand is successful.
Even in those conditions, if an ASA doesn’t have well thought out tokenomics it can become worthless very quickly and suddenly. As we’ve discussed before, YLDY is a good cautionary tale:
A lot of people were buying around 0.02A and lost a lot of money since then due to Yieldly’s poor tokenomics and generally stagnant product.
But even if Algorand is successful and an ASA has great tokenomics, it still needs to provide the right value exchange – whether that be through providing users with real yield or utility.
Gov Tip: Check out our DeFi Fundamentals posts on Tokenomics and Quality Projects if you want to learn more.
That’s a lot of variables to juggle, especially on a long enough time horizon. That’s why I don’t overinvest in ASAs, no matter how excited I am about the project’s potential. Unfortunately, I’ve seen a lot of fellow govs make this mistake and lose a big portion of their ALGO.
But this doesn’t mean you can’t make A on ASAs – especially if you set exit points.
With ASAs specifically, I split my investments up into three categories: short-term, medium-term, and long-term. My exit targets for each differ. For short-term, I usually aim to sell within a quarter; medium-term is anywhere from 1 - 3 years out; and long-term is as my moonbag.
In addition to the above, it's important to consider how ASAs fit into your portfolio's overall allocation. Are you going to invest 20% of your portfolio in ASAs? 30%?
Whatever that number is, it will help you avoid scenarios in which you're overinvested and getting a case of the HODL-itis.
Using this approach, I’m on target to make 3x on my ASA position this Governance period alone. So, there’s definitely A to be made with ASA trading, but I’d caution you to have the right mindset and approach.
Remember that a little can go a long way with ASAs and ALGO is king.
Accumulation Technique #3: Liquidity Pools
Another way to take advantage of ASAs is through liquidity pools (LPs).
However, here’s what I see people doing wrong with their LP investments: they don’t log their entry points and they don’t have an exit plan.
Without the former, investors can't track how much they've made from fees or how much they've gained or lost through rebalancing. But more importantly, without the latter, they often pull their liquidity at less than opportune times and miss out on maximizing their gains.
Let’s review an example of how to execute this.
Back in Governance Period #3, I entered the ALGO/USDC LP on Pact when ALGO was $0.78. My thesis was that the market was going to crash, so I created a plan to collect Aeneas rewards until that happened and pull my liquidity if ALGO hit my target range ($0.35 - $0.50) to buy the dip.
After ALGO crashed, I pulled my liquidity, bought the dip at $0.37, and walked away with an extra 500A – a 50% APR on my original investment.
This current period, I did something similar on Humble. I entered the LP on Humble when ALGO was $0.35 with the expectation we would go lower, and exited my position when it ALGO dipped to $0.24 and bought the dip for an additional 350A in profit.
Gov Tip: Taking market conditions into account with liquidity pools is a great way to take pseudo long or short positions on ALGO while earning taker fees and rewards when available.
In addition to the above technique, I’d recommend you have a plan in place for the rewards you earn through programs like Aeneas. Are you going to sell them for ALGO? Roll them back into the LP? Stake them?
I personally sell my rewards for ALGO on a weekly basis, taking all my profits back into ALGO, but do what makes sense for you. As long as you have a plan and stick to it, you’ll be ahead of the curve.
Accumulation Technique #4: NFT Investing
We’ve reviewed a lot of mistakes together, but I don’t think I’ve seen more people make more mistakes than with NFTs. While ASAs are one of the riskiest investments you can make, NFTs as a whole may be the most risky if you don’t approach them with the right mindset.
Seriously, I don’t think I’ve seen so many people allow themselves to be overtaken by FOMO and YOLO into projects they did all of five minutes of research on. And then refuse to sell after making a 10x on their investment because they’re convinced it’s the next Bored Ape Yacht Club.
And we didn’t even touch on the amount of rug pulls in the space.
It’s the wild west manifested into jpegs, gov.
However, as always, you can mitigate a lot of these problems by doing your due diligence, carving out a portion of your portfolio for NFTs, and setting exit prices.
With NFTs, my price targets are similar to my other investments: 2x, 3-5x, and 10x+. However, there are so many risks and variables involved that it's harder to determine if those targets will be hit. That's why it's so important to stick to those targets, because if they hit, there's no guarantee it won't go straight to zero next.
In fact, I often aim for a quick flip right off the bat to recoup a portion of my original investment and mitigate my overall risk.
The great thing about NFTs is the secondary market is full of FOMO in the first 48 - 72 hours of the initial mint, so it’s pretty common to double or even triple your investment immediately. In some instances, I’ve had the luck to draw a rare piece from the collection and recoup my original investment all in one sale.
But no matter what you’re investing in – whether that be ALGO, ASAs, or NFTS – make sure you consider your exit strategy if you want to stay ahead of the curve.
And please, remember HODL is and will always be a meme.
Until next time, gov.