As I update this article, it seems most major Cryptocurrencies are oscillating on a seemingly daily basis by several percentage amounts following news of regulatory crackdowns, exchange collapses (FTX anyone?), broad market corrections or due to everchanging sentiments on social media.
Further with more digital “coins” and decentralized finance platforms still coming out at regular intervals it’s feeling like the Crypto space is becoming a pyramid or pump and dump scheme.
Just look at some of the names these new coins are getting, like “scam-coin” which raised $70M in one hour! Further, coins are being created on a seemingly daily basis on the latest trends like the now defunct squid-games coin.
But the biggest news lately has been the collapse of Crypto exchanges (like FTX, Voyager etc) and related tokens. This has really shaken the foundations and trust of many retail investors in even the most popular and long lasting cryptos like Bitcoin and Ethereum.
Still among all the noise a lot of people are asking, especially those who have recorded some phenomenal gains or have been holding for a while, should I sell now to take some money of the table or diamond hands and hold on (and possibly buy more!)? Here’s a look at the options from my view point.
Should I Sell?
If you were an early buyer and still have a decent profit, which means anything more than a tripling or quadrupling of your initial investment based on the latest prices, then given the recent volatility many personal finance experts say it maybe a good time to sell an amount equal to your original investment up to 50% of your holdings.
This way you are playing with house money while taking enough off the “table” to cover capital gain taxes (yes, crypto gains count) and enjoy a very generous return compared to most other asset classes.
The logic is also that by selling and taking profits now, you can swoop back in and buy more at a later did when the dust settles. No one can really predict the wild swings of Crypto and the smaller or newer a digital coin, the more the volatility. Which could mean huge upside or big time downside.
So selling now, and coming back later could be a prudent move if you want to convert some of your digital gains to real US dollars in your bank account.
The one other thing to consider is the tax implications of selling. Right now any unsold positions equal unrealized gains or losses. But as soon as you sell you may have a significant tax bill, especially if you bought a long time ago.
So you need to ensure you keep some of your proceeds around to pay estimated taxes or have it ready for filing time.
Tax Filing Pro Tip (courtesy TurboTax): According to IRS Notice 2014-21, the IRS considers cryptocurrency to be property and not a virtual currency. As a result capital gains and losses need to be reported on Schedule D and Form 8949 if you made a net gain. Gains from mining cryptocurrency on the other hand are concerned earnings and reporting on Form 1099-NEC as if it were self-employment income.
Alternatively if you want to lower your tax hit, hold on for more than 12 months and pay the lower longer term capital gains tax. But don’t let taxes be the main decider if you buy or sell, just make it one factor to consider.
When in doubt, hold (or “hodl” as some say). With all that is going on and massive swings up and down on a daily basis, holding could be the best option. This is particularly the case if you have only invested a relatively small amount and can ride out the short term swings because you think longer term, one or more of the Cryptocurrencies are here to stay and will become a core part of the financial ecosystem.
I am in this bucket after recently buying $1,500 of Ethereum and $250 of Dogecoin via Coinbase. Ethereum I believe is more than just a digital currency (like Bitcoin) and instead provides a broader platform to enable Crypto “Apps” that will add a lot more value over the longer term.
Since I am happy to hold for the next few years and its not a big investment, I can live with downside in the near to medium term. Dogecoin (and more recently Shiba Inu) was just a momentum play and I do not expect that to be a core holding longer term, but gives me a way to get a better understanding of Crypto and enjoy the show that Elon Musk is putting on around this coin going to the moon!
If you are confident in the long term future of Crypto and any specific coin(s) then any significant correction could be a good time to buy even more Bitcoin, Dogecoin, Ethereum or whichever digital currency/platform you believe in.
I recommend you always trade crypto through reputable and regulated brokers like Robinhood or Coinbase. You do not want to deal with unregulated or private exchanges like FTX, which are under investigation for fraud as billions of customer funds were misused.
Many strategists, including some from large banks like JPMorgan predict that the price of Bitcoin could go over $100,000 per coin in the long term and push its market cap above stocks like Apple. I think this is unlikely anytime soon, given current market conditions.
So buying now could mean a tripling of your money in a relatively short time – not many places you can get that. But it will likely be a bumpy ride due to all the speculative mania and market manipulators looking to make a quick buck by shorting or pumping Crypto at regular intervals. So buyer beware is the mentality you should have.
Recurring Investing to offset Market Volatility
Another popular option if you are not sure of where the market will go in the short term, but a long term believer in the future of Crypto, is to dollar cost average invest. This means investing a set amount into specified investments on a regular schedule.
For example, $150 per week every other Friday is an investment I have in Ethereum. You can have a daily or monthly schedule if that works for you as well and through the major Crypto brokers you can easily implement this recurring investment approach for any coins they offer.
I like this strategy because it allows you to have a long term view, while take advantage (and ignore) short term volatility.
I’ll post updates on the above as things change and feel free to share your opinion in the comments below. Enjoy the ride.