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When To Sell Bitcoin: Should I Sell My Bitcoin?
Frankly speaking, there is no “perfect time” to sell bitcoins or any other cryptocurrency, as different traders have different goals. Someone profits from small price movements, and someone is a “good old hodler”.
Many investors have different strategies and perspectives when it comes to selling Bitcoin, influenced by their financial goals and market conditions.
The answer to such a question is that you should sell your crypto assets based on your strategies and personal financial goals. If, however, you are asking a slightly different question, which is more like: “What strategy should I implement? How do I minimize my losses?”, then continue reading this article.
Understanding Your Bitcoin Investment
What was your original motivation for buying Bitcoin?
When considering whether to sell your Bitcoin, it’s essential to reflect on your original motivation for buying it. Did you buy Bitcoin as a long-term investment, hoping to benefit from its potential for growth and increased value over time? Or did you purchase it with the intention of making a quick profit in the short term? Understanding your original motivation can help you make a more informed decision about whether to sell your Bitcoin.
If you bought Bitcoin as a long-term investment, selling during a temporary market downturn may not align with your original plan. Long-term investors often aim to ride out market fluctuations, anticipating that Bitcoin’s value will increase over the years. On the other hand, if you bought Bitcoin with the intention of making a quick profit, you might want to consider selling if the price has increased significantly since your purchase. This approach can help you capitalize on short-term gains and avoid potential losses if the market takes a downturn.
What is your risk tolerance?
Another crucial factor to consider when deciding whether to sell your Bitcoin is your risk tolerance. The cryptocurrency market is known for its volatility, and the value of Bitcoin can fluctuate rapidly. If you’re risk-averse, you may want to consider selling your Bitcoin if the price has increased significantly. This strategy can help you lock in your gains and avoid potential losses, providing peace of mind in a highly unpredictable market.
On the other hand, if you’re comfortable with taking on more risk, you might consider holding onto your Bitcoin, even if the price has increased significantly. This is because the value of Bitcoin could potentially continue to rise, and selling too early could mean missing out on further gains. Assessing your risk tolerance is essential in making a decision that aligns with your financial goals and comfort level with market volatility.
The lesson of the dot-com bubble
Everyone remembers the infamous dot-com bubble in the stock market caused by excessive speculation in the stocks of Internet-related companies in the late 1990s. Those investors who were able to sell shares in these companies when their value rose 400% made momentous profits, while those who continued to wait because they believed they could go higher suffered a market crash in October 2002 and suffered losses of up to 80% of their investment.
Many believe that cryptocurrency has nothing to do with the dot-com bubble and it will stay with us for a long time. However, the high volatility and speculation in this industry makes each asset particularly risky.
What to keep in mind when selling bitcoins: potential tax implications
Always be aware of bullish and bearish trends
Like the traditional stock market, the cryptocurrency market is largely determined by the sentiment of all stakeholders - big whales, small holders, HODL investors, cryptocurrency regulators and others. The degree of influence on trend direction depends on either the size of BTC holdings or the level of influence on opinions. A tweet by Ilon Musk or a government regulation on bitcoin can significantly push the market in a certain direction, while the average trader will only have a minor impact, making it essential to consider Bitcoin's long-term value in your investment strategy.
Thus, there is no reliable way to know market sentiment accurately. Bearish sentiment is difficult to hold on to. A bull market in turn can also be tough, although it seems inconceivable for an outside character to know that people are making 10-30x returns.
Cryptocurrency trading has never been easy, but if you keep an eye on bullish and bearish indicators, you’ll know when to sell and profit. To do this, you need to keep an eye on many things - price charts, numerous charts and summaries, and definitely bitcoin news: What companies are betting on bitcoin? Who tweeted what and who tweeted what? Which government is backing blockchain technology? - And so on.
Good timing for short term capital gains
As discussed above, there is no concept of “right time” in a rapidly changing market, nor is there a precise answer to the question “When to sell?”. A sensible approach is to gradually close parts of a position, gradually locking in profits and leaving a portion to benefit when the price rises further. This is called scaling.
Timing is crucial when selling crypto, as the volatile nature of the market can significantly impact your profits.
For example, you could sell 10% of your position every time the price rises by 20%. Is this an optimal approach? Not optimal, but such scaling is likely to yield good profits with less stress. There is nothing optimal about cryptocurrency trading at all. Different traders have different strategies that fit in their heads. Therefore, the optimal strategy for everyone is still the strategy that fits personal financial goals, but not trying to get rich lightning fast.
The truth in any case is the fact that on “parabolic” markets in most cases the income is 40% less than on absolute peaks. You need to be really aware of this, especially given the extreme volatility of the cryptocurrency world.
Let’s assume that, you invested 10 thousand dollars in bitcoins and with proper management turned it into 100 thousand dollars. That feeling of having managed to make 10x is truly overwhelming. But what if the value of the portfolio then dropped to $70k? That’s already painful, isn’t it? In this case, just look at the situation from a different angle, like sticking to the negative version, “I only lost 30% relative to the peak itself!” or the opposite positive version, “I made 7 times as much from the start!”.
Never panic and stick to your plan
Impulsive buying or selling will almost always hurt your pocketbook. You need to be resilient to things like FOMO (“fear of missing out”, rushing into a purchase) and FUD (“fear, uncertainty and doubt”, rushing into a sale). Having a clear strategy for when to sell crypto can help you avoid impulsive decisions and potential losses.
The most sensible approach is to always place a stop-loss on every market entry, or use a TWAP order to spread your transactions over time and volume. If the market is positive, you can always change this stop loss so that when the price falls below the set limit, the position will close immediately and thus save you from further losses.
If you are exposed to FOMO, never go “all-in”. Increase your risk tolerance as the market gradually rises (using TWAP trading or a grid strategy) by starting to sell gradually.
Be careful with leverage
Leveraged trading is the practice of increasing trading volume by borrowing against collateral (initial margin). The amount by which a position is increased is called leverage. For example, a trade with 20 times leverage will allow you to operate with funds that are 20 times your own investment.
Of course, the potential profit of such volumes will not leave anyone indifferent. However, when the price of the purchased asset starts to fall, your initial margin can be quickly liquidated, i.e. the collateral will be completely lost. This means that if the market goes against your forecast, you will also lose 20 times more than in a normal trade and will lose your initial investment much faster.
Remember that when trading with leverage, both profits and losses are multiplied. Therefore, be careful when trading with leverage. When trading like this, the use of stop loss and take profit instruments is mandatory to minimize the potential risks of leverage. Understanding the relationship between Bitcoin and fiat currency is crucial when engaging in leveraged trading.
Short positions
Contrary to the unfamiliar name, short positions or shorts refer to gaining profit by falling asset prices. Basically, it is borrowing some cryptocurrency to sell it with the expectation of buying it back at a lower price to return it to the lender. Shorting is done in a bear market.
Let's look at a simple example - you borrowed 1 bitcoin and sold it at a price of 50,000 dollars, expecting the price to fall. When the price drops to $45,000, for example, 1 bitcoin is redeemed and returned to the lender, leaving you with a profit of 5,000 minus interest on the loan.
Short selling can be profitable in a bear market, but if you try to engage in such transactions during short corrections, you could suffer huge losses when the price rises sharply.
However, regardless of long or short positions, leveraged trading or any other trading strategy, proper risk management can save you from losses. And that is the main thing to learn.
Automated trading strategies
In automated trading, a bot performs market operations for you according to a specific trading strategy. For example, some companies offer bots that use a grid algorithm for sideways and uptrending markets. The bot's algorithm executes trades according to a set of trading rules predetermined for it. Regardless of the market phase, these bots look for opportunities to buy cheap and sell high at every price fluctuation. There are high-yield and low-risk strategies. The key is to find a compromise between risk and return. High-yield strategies are subject to double volatility, because in this case both the base and the quoted currency fluctuate. For example, you can set up and run a bot to trade the AAVE/BTC pair, which involves accumulating profits in BTC. Now just imagine that the prices of both AAVE and BTC are rising against USDT, which creates a multiplier effect.
The three main principles of risk management are: risk tolerance
Stop-Loss
A stop-loss is an extended order that automatically closes a position if the price of a crypto-asset falls below a set value, thus saving you from further losses. Let's say you have purchased $1,000 worth of BTC and can only afford to lose $100 of your investment. To do this, simply set a stop loss, which will sell your bitcoins as soon as their value falls below 900 dollars.
Take Profit
Take profit will close the position when the set profit level is reached. It eliminates the need to monitor the situation manually. It should be carefully planned, because an underestimated value will result in reduced profits if the price soars above the predicted level. A properly planned profit level will also protect you from losses if the market sharply declines after a jump.
Do not put all your eggs in one basket: tax loss harvesting
Although cryptocurrency itself is quite unstable, cryptoassets considered individually are not always subject to a sharp fall at the same time. For example, having five crypto assets in a portfolio, two of them are inefficient or generate losses, but the profits from the remaining three will offset them. Therefore, it is highly recommended to diversify your portfolio, to reduce losses in the highly volatile crypto market. Additionally, having a linked bank account can facilitate easier transactions and withdrawals when managing your diversified crypto portfolio.
Most cryptocurrencies are highly correlated with the volatility of Bitcoin, moving in tandem with it in the same direction. But if Bitcoin grows by 10%, some of these cryptocurrencies can grow by 5% or 20%. The same can happen when it falls. Therefore, be sure to diversify your portfolio with those assets that match your preferences in terms of volatility. To compare changes in asset prices and their correlation, we recommend using TradingView.
Tax Implications of Selling Bitcoin
Understanding Capital Gains and Long-Term Capital Gains
When selling your Bitcoin, it’s essential to understand the potential tax implications. If you sell your Bitcoin for a profit, you’ll be subject to capital gains tax. The tax rate you’ll pay depends on how long you’ve held your Bitcoin.
If you’ve held your Bitcoin for less than a year, you’ll be subject to short-term capital gains tax, which is taxed at the same rate as your ordinary income. This can result in a higher tax bill compared to long-term capital gains. However, if you’ve held your Bitcoin for more than a year, you’ll be subject to long-term capital gains tax, which is typically taxed at a lower rate. This distinction can significantly impact your net profit from selling Bitcoin.
It’s also important to note that IRS views Bitcoin as property, not a security, which means that the wash sale rule does not apply. This means you can sell your Bitcoin, claim a capital loss, and buy it back shortly after without triggering the wash sale rule. This can be advantageous for tax loss harvesting strategies, allowing you to offset other capital gains with your losses.
Understanding the tax implications of selling your Bitcoin can help you make a more informed decision. It’s always a good idea to consult with a tax professional or financial advisor to ensure you’re making the best decision for your individual circumstances. This can help you navigate the complexities of capital gains, short-term and long-term tax rates, and other potential tax implications.
In conclusion
No matter how optimistic you are, cryptocurrency trading continues to be a risky business. There are no exceptions and even top crypto assets can drop in value by 80% and stay that way for a very long time.
But with proper analysis and correct risk management, you have the opportunity to profit even in a bear market. The main thing to remember is that you should not trade impulsively, all trading operations should be based on analysis, both technical and fundamental, and strategies developed and comfortable for you personally.
