A common question from crypto-curious investors is when and if they should sell their profits. There is no way to extract crypto profits without selling the currency in exchange for cash. When to sell depends on the investor’s strategy and long-term financial plan based on their wealth goals. At DWG, we encourage a HODL investment strategy (buy and hold) for Bitcoin.
Taking profits on your investment is healthy, especially if you are sitting on significant gains. Thus, a long-term HODL (buy and hold) strategy with regular profit-taking is probably the best investment strategy one can make when investing in Bitcoin or other cryptocurrencies.
Cryptocurrencies do not “produce” profits for their owners like a bank account or a bond. You can only lock in a profit with the rise and fall of the market along with your decision to sell some of the cryptocurrency you hold to extract the wealth. However, unless an investor reinvests those gains or has a specific plan for their overall investment strategy, selling has no long-term advantage. The money is simply spent without increasing future wealth. Hence, selling without a plan can lead to financial regret.
“Crypto is a volatile market,” says every major news outlet. Cryptocurrencies move up and down with seemingly unpredictable speed, making trying to time their peaks and valleys exhausting. But these headlines miss the big picture that Bitcoin has increased in value overall for most of its existence (up 90% of the time since inception). This is why, as the old saying goes: time in the market > timing the market. You always want to have some skin in the game to ensure that your hard-earned money is working for you.
This is partly why at DWG, we encourage “buy and hold,” often referred to as HODL. The term was born in 2013 when someone on a finical forum typed, “I AM HODLING (sic.).” Instead of “holding.” The typo was swiftly turned into an acronym for “hold on for dear life.” Internet slang might not be the most sophisticated way to talk about investment strategies, but that doesn’t discount the seven reasons for HODL.
We’ve said it before, and we’re repeating it: Bitcoin is set to become the most scarce asset on the planet. Every four years, the amount of Bitcoin mined is halved, and there will never be more than 21 million coins minted. Thus it is more like Gold than anything. Furthermore, it is no one’s liability.
However, by the time the last Bitcoin is mined, there will be fewer than 21 million Bitcoins due to people losing them. Cryptocurrencies are “lost” for several reasons, such as forgetting where they stored their wallet or dying and not leaving the passwords to surviving family members.
Thus, Bitcoin is like a fixed amount of gold, where some of it becomes permanently lost. Therefore, a long-term strategy suits Bitcoin as its overall wealth increases as it becomes harder to find any for sale.
As we acknowledged above, the media is correct that cryptocurrency is volatile, going up and down, sometimes significantly. During these ups and downs, investors can feel overwhelmed or pressured to sell or buy. Trying to trade cryptocurrency and time the peaks and valleys is stressful and unpredictable. It can quickly go wrong.
However, from Bitcoin to Dogecoin to pretty much any valuable asset, the people who focused on a HODL strategy through the years are steadily seeing their investment increase in value. They’ve also protected themselves from costly mistakes by mistiming the market, buying high, and selling low.
Trading is a time-consuming strategy that requires substantial knowledge, experience, and research. As the stock market has shown repeatedly, trading can go wrong. Even those who had been in the business for most of their life still lose big when trying to play short games.
HODL strategy uses up less of your precious time and prevents you, as an investor, from risking your wealth to panicky decisions. Suppose your strategy has been written into your long-term financial plan. In that case, you’ll have established your boundaries and be able to make rational decisions when those boundaries are being crossed. Thus, HODL isn’t lazy; it is good time management while looking after your financial future.
Transactions in the digital landscape come with transactional costs. The more you try to day trade, the more the movement of your wealth is eating your time and money. When you have centered HODL into your long-term financial plan, you have set the boundaries and timelines for when to transact. This minimizes how often you lose some of your wealth to a third party.
Following the HODL strategy in your financial plan will minimize seller’s remorse. Sound financial methods are developed during rational moments, with clear-cut boundaries. HODL reminds you not to panic or impulsively follow trends while saving you time from worry. This liberates you from being chained to the market and being able to live while your money works for you.
HODL protects your investments from low-interest rates in the fiat market. Unless you have a clear-cut plan of where your cryptocurrency’s profits will be reinvested, selling your crypto investment puts your money back into fiat currency, where it earns little interest. Thus, you might have made a temporary gain, but by doing so, you have given up the financial freedom of having your money work for you.
The global political landscape is volatile, putting the future security of fiat currencies at risk. With wars breaking out and political alliances shifting, government-controlled currencies’ long-term futures are threatened. Cryptocurrencies are not tied to governments; thus, HODL keeps your wealth in a digital landscape away from the political upheaval.
In some situations, selling some of your crypto investment gains might be the right decision for you. But you’ll know what those are if you’ve made a long-term financial plan. Some of these could be:
Another reason to sell and take some profits is diversification. Having all your eggs in one basket is not a wise investment strategy. Investing some profits into other alt-coins (coins that are not Bitcoin or Ethereum) may be one way to diversify. Alternatively, you can re-invest into other non-crypto assets; using the crypto profits you made to invest in more traditional assets such as stocks and bonds can help you diversify your overall holdings. Although returns on these traditional assets are far lower (little to no chance of a 10x), you could gain some stability in these less volatile alternatives.
Selling profits from your cryptocurrency should be part of a long-term strategy and not an impulse decision. HODL’ing your investment will save you time and help you avoid regret. If you are interested in learning more, please get in touch with us to be reduced by half suddenlytwould fourDWG. We’re always here to help.
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