When Crypto Investors Should Take Money Off the Table, As Explained by Legendary VC Fred Wilson

When Crypto Investors Should Take Money Off the Table, As Explained by Legendary VC Fred Wilson

Jan 9, 2018

One of the most respected names in venture capital said that investors sitting on stockpiles of cryptoasset wealth should consider taking a small portion of their position off the table to solidify their gains while preserving future upside potential.

Legendary VC Fred Wilson Explains Why Crypto-Heavy Investors Should Take Money Off the Table

The unprecedented ascent of cryptoasset values over the past year has left many early adopters with newfound wealth, and while sophisticated investors follow a specific investment strategy, many of the newly crypto-wealthy have little-to-no experience investing outside of the cryptoasset markets.

Fred Wilson
Fred Wilson | Source: Brian Ach/Getty Images

That’s why Fred Wilson, a co-founder of New York City-based venture capital firm Union Square Ventures (USV), penned a blog post on Monday in which he discussed what is a hard, but pertinent question for many early cryptocurrency investors: “When is the right time to take money off the table?”

Wilson said that investors with outsized returns should consider selling as much as 30 percent of their positions.

“If you are sitting on 20x, 50x, 100x your money on a crypto investment, it would not be a mistake to sell 10%, 20% or even 30% of your position,” he wrote. “Selling 25% of your position on an investment that is up 50x is booking a 12.5x on the entire investment, while allowing you to keep 75% of it going.”

This does not mean that Wilson is bearish on the future of cryptoassets. In fact, he is quite bullish.

USV is best known for its investments in tech startups such as Twitter, DuckDuckGo, Kickstarter, and Indeed. However, it has also purchased stakes in a number of companies that operate in the cryptoasset space, including bitcoin exchange Coinbase, Filecoin creator Protocol Labs, and cryptoasset hedge fund Polychain Capital.

union square ventures
Union Square Ventures has positions in several startups involved in the cryptoasset space, but co-founder Fred Wilson says that crypto investors with outsized returns should consider taking some money off the table to secure profits.

However, as Wilson explains, believing in the potential of an investment does not mean one should go all in.

“Taking money off the table is smart portfolio management. It is very different from selling your entire position, which could be brilliant but is equally likely to be a mistake. Selling a portion of your position, returning a multiple or two (or eight) of the fund, and holding on to the balance works out for you no matter which way the position goes in the future,” he wrote.

Wilson said that USV faced a similar quandary in the years prior to Twitter’s IPO. USV had purchased a 15 percent stake in Twitter for $3.75 million in 2007, but by 2011 that investment was worth approximately $1 billion — or eight times the size of the $125 million USV fund.

Ultimately, USV sold 30 percent of its position for about $250 million, returning twice the size of the entire fund to investors while preserving the potential upside of the remaining 70 percent of the investment.

Even though USV ended up netting less than it could have if it waited until the IPO to exit any part of its position, Wilson explained that the sale allowed the fund to retain an outsized Twitter position without the risk of failing to secure profits from the investment.

Wilson said that cryptocurrency investors should adopt the same mindset as they approach their investments.

“If the position blows up, you got a lot out and booked a huge gain. If the position goes up significantly, you make even more money on the part of the investment you retained. If it goes sideway, you got a little bit out early. It is a win/win/win pretty much every way you look at it,” he concluded.

Avoid Emotion-Based Investing

The advice is a good reminder for cryptoasset investors, as it is all too easy to become emotionally attached to an investment, particularly if one became involved at an early stage in the project’s development. This can, wrongly, make novice investors feel as though they are betraying a project if they take profits and reduce the size of their position to diversify their portfolios and mitigate risk.

On the flip side, however, investors with outsized returns should avoid the temptation to liquidate an entire position simply because it appears to have reached a peak.

As Civic CEO Vinny Lingham once explained, one can never predict the future course that a cryptoasset’s price will take. Consequently, he said that investors who exit extremely profitable positions — e.g. with 300 percent or greater returns — should retain up to 33 percent of their stakes in case the assets do have further upside.

One need only observe the lack of foresight exhibited by many early bitcoin investors to realize the wisdom of Lingham’s advice.

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