With the high-profile bankruptcies of major cryptocurrency companies throughout 2022, including FTX, Celsius, Voyager, and more, many investors have grown weary of the crypto industry. It seems like every day, cryptocurrencies are freefalling following news of government regulations, rising rates, hackers, divided sentiment on social media, etc.
Despite the uncertainty, a recent report by Gemini found that cryptocurrencies are beginning to get more mainstream acceptance, with roughly 20% of the US population owning crypto and 41% of adults globally who are crypto-curious. But, at the same time, due to recent events, many investors are starting to ask whether they should sell now to take profits or double down on their crypto investments.
With the volatility in the crypto market, it’s hard to know when the right time to sell is and how much to sell. But, thinking about the implications of selling will give you the clarity to unload your investments wisely. We will guide you through this decision to help you get a better grasp of your portfolio.
- The cryptocurrency market is volatile and unpredictable. Many cryptocurrencies fluctuate daily.
- Before investing in digital currency, set specific financial goals. Your goals will shape how you invest your capital and help you determine when to buy or sell.
- There are several reasons investors sell their cryptocurrency, which we will cover below.
Looking at the Big Picture
When comparing the cryptocurrency market to other financial markets, such as stocks, bonds, or real estate, selling happens frequently across all asset classes. People buy and sell investments all the time, whether to take profits, cut losses, or reallocate their portfolios.
For example, if you invested in Peloton stock at the beginning of the pandemic, around March 2020, and sold at its peak in December 2020, you would have made sizeable gains and ~8x your initial investment. But, if you are still holding as of December 2022, you may have ended up losing a lot of money or bagholding as Peloton continues to get hit with bad news after bad news.
With investing, you generally have two options – let your money run and see if it will reach higher highs or take profits while you are still up. Understanding when to let things go is just as important as finding good buying opportunities.
Crypto is Volatile
Before we talk about when to sell, we need to acknowledge that volatility is the name of the game when it comes to crypto. While investing in Bitcoin and other altcoins, such as Ethereum or Solana, can lead to high potential gains, there are a lot of risk and external factors to consider.
There are no guarantees in the crypto space, so traders and investors rely on market sentiment and hype to take the markets to the moon. While this is also the case with stocks, the issuing companies behind the stocks typically generate growing cashflows year over year. With that said, the cryptocurrency market can swing drastically from extreme optimism to overwhelming FUD (fear, uncertainty, doubt).
Because most coins do not have backing from fiat or businesses, their value gets derived from hype, demand, and viable use cases. If we look at some of the top coins from 2017 and compare them today, many of them are no longer in the top 10, whether because they have lost traction or have not met investor expectations.
No matter the reason, losing everything is a very real possibility. And that possibility is compounded today, with pump and dump schemes like the Squid Game coin or EthereumMax. So, brace yourself before making any financial decisions regarding crypto.
Before making an investment decision, you need to understand your financial goals. What are you hoping to achieve by investing in crypto? Are you looking to buy and hold, or do you want to make quick profits? Some factors to consider while setting goals include your age, risk tolerance, available capital, and time horizon.
Once you have an idea of your end goal, you need to think about your expected return on investment (ROI). If you are a buy and hold investor, you may be more interested in riding the highs and lows and buying the dips first rather than thinking about selling. In this situation, if you believe in the long-term potential of your investments, you would be better off making your initial investment and then forgetting about it.
Unless you are a day trader, price action alone should not be a deciding factor in your decisions to buy or sell crypto. The last thing you want to do is jump in on the hype at an all-time high and let your emotions drag your portfolio down.
One way to go about this is to scale your positions. For example, if you want to lock in profits, you can set limit orders to sell a percentage of your crypto as it reaches your price targets. But, this decision gets more difficult the more money you invest. As your investment grows, you will need to make tradeoffs between taking profits or letting your money run.
7 Reasons to Sell Your Cryptocurrencies
1. Taking Profits
If you have more than 3x or 4x your initial investment, consider selling a percentage of your original investment. With the amount of volatility in the crypto space, it may make sense to sell and take some profits while you are still up. That way, you end up playing with house money rather than your own money and lower the stakes. Doing so will also help cover capital gains taxes on your crypto profits while ensuring that you still get a generous return on your money.
The logic behind selling is that you can use the profits to buy back your positions when the market dips. Given that crypto can swing wildly on any given day, coupled with the relative newness of many altcoins, there can be huge upside and downside potential. So, if you want to ensure that you profit, you can scale your positions in and out by watching what’s happening in the markets. A few techniques you can use to do this include identifying support and resistance levels and reading candlesticks.
2. When Top Exchanges Stop Carrying Your Crypto
With thousands of altcoins available, major exchanges like Coinbase have to ensure they list digital assets in a secure and compliant way. So, if top exchange platforms stop carrying a cryptocurrency you hold, other exchanges will likely follow suit. If this happens, you may end up with a useless asset because there is no guarantee that you can sell your coin in the future. So, selling while you still have the opportunity to do so may help you avoid losing all your money.
3. Lack of Discussion
Most cryptocurrencies are not backed by any products or companies. So, their value usually gets derived from hype and a loyal user base. If you stop hearing news about a coin or the implementation starts drying up, that is a very bad sign.
Like fiat currency, cryptocurrencies need people to use them to survive. If they do not have enough buy-in, it becomes harder for them to rise in value and for exchanges to justify continuing to list them. Looking at Dogecoin as an example, much of the hype has died down since Wall Street Bets and Elon Musk pumped it in 2021. It started at less than one cent at the beginning of 2021 and rallied to ~69 cents before falling back to ~7 cents today.
4. Unfavorable Government Policies
Many governments see cryptocurrency’s decentralized, non-fiat nature as a threat. Particularly in countries where the government has an iron grip on the internet, they tend to favor banning trading or mining specific crypto, if not all of them. In a 2021 summary report by the Law Library of Congress, roughly 51 countries have put either an absolute or implicit ban on cryptocurrency, including China, Egypt, Qatar, and Bangladesh.
Whenever countries like China and Russia attempt to ban trading or mining crypto, the market will take a hit as people sell out of fear. While the decentralized nature of cryptocurrencies makes it more likely for you to find other users globally, there is no guarantee that they can bounce back.
5. Pump and Dumps
Sifting through the endless sea of altcoins is not easy. There are a lot of coins out there that are overhyped and overvalued, but have a loud and loyal community, making it hard to screen out the noise. Unless they are pristine assets, such as Bitcoin and Ethereum, it may be best to avoid coins that run up quickly without any backing or widespread usage (think Squid Game coin). These types of altcoins usually end up crashing hard or going to zero.
6. Beware of FOMO
Fear of missing out is real, particularly in the crypto space. We have all had assets that we bought or sold, only to see a drastic price change in the opposite direction the next day. This fluid nature is an unavoidable part of crypto and is a big reason many investors prefer to buy and hold. But, sometimes, you may be better off enjoying some profits to avoid losing everything in the blink of an eye.
7. The Investment No Longer Makes Sense
With any investment, it’s crucial to do your own independent research. For crypto specifically, make financial decisions based on whether the coin makes sense or not. Who is behind the cryptocurrency, and what other projects are they involved with? What problems are the crypto projects trying to solve? Is the white paper well presented? What is the market cap, and how do their tokenomics work?
Getting the answers to questions like these will help you gather more information on your investments and limit losses. If the coin does not seem useful or competitive anymore, your best bet is probably to get rid of it.
Let Your Investments Grow and HODL (Hold On for Dear Life)
If you are bullish on the long-term potential of cryptocurrency or any specific projects, then when the market dips, that could be a signal to double down on your conviction and buy more. Many strategists, including Goldman Sachs, predict that the price of Bitcoin could go over $100,000 per coin in the coming years, while Ethereum could reach $10,000.
So, buying now when prices are down could mean that you would potentially triple or quadruple your initial investment. However, this path to financial wealth will not be easy, particularly with the speculative mania and whales manipulating the market.
In this situation, the best approach is to invest for the long haul, or basically to diamond hands and hodl (as crypto enthusiasts like to say). Rather than looking for a quick buck, look for coins you believe have value and hold onto them for as long as possible.
While there is no guarantee that this strategy will help you profit, history has rewarded hodlers favorably in the long run. If you bought Bitcoin back in January 2017, you would have more than 35x your money at its peak – a feat that no other asset would come close to doing!
Investing at regular intervals through dollar-cost averaging would give you a good chance at success. While short-term investing could lead to faster gains, it requires timing the market, which is extremely difficult to do successfully. Nobody knows what will happen in the future, so it’s hard to predict price movements and buy at the bottom or sell at the top.
Where to Buy and Sell Crypto
Currently, I use a mix of exchanges platforms to buy and sell crypto, including Coinbase and Gemini. I have found Coinbase to be the most straightforward to use for beginners. Previously, I had holdings in Celsius and BlockFi, but both companies have filed for bankruptcy in the last few months are are likely defunct.
What you decide to use will depend on your personal preferences and understanding of crypto. Some platforms are less user-friendly and have a steep learning curve, making them more difficult to navigate.
The Bottom Line
When the market dips, it can cause fear and anxiety. But, use the dips as an opportunity to reassess why you decided to invest in crypto or a specific coin in the first place. There will always be hard choices to make, and there’s no guarantee that you will make the right choices every time. But, if you believe in blockchain technology and have done your research, have faith in whatever you decide to do and manage your risk accordingly.