Market Movement Strategy
When to take bitcoin profit depends on your individual investment strategy – just as with any other investment. However, the crypto space is one often driven by emotion and news. When the market starts moving upward after a bear market, online news articles, blogs, and videos start speculating about the next big bull run. Has it begun? Is it a bull trap? Is the bottom in? Is it moon time? A couple of days later, when a correction occurs – the sky is falling, we’re going to $2K, bitcoin is dead. The key is to hold true to a strategy, examine all implications of profit-taking, and determine if what is the right move for you.
What is your investment strategy and when is a good time to take bitcoin profit? If you’re a swing trader, you’ll be looking to buy low and sell higher to make a successful trade resulting in a profit. If you’re a long-term investor and you bought a bitcoin at $3,500, selling at $5,200 would seemingly result in a tidy bitcoin profit. But if you hope to buy back at $4,500 there may be a flaw in your plan and disappointment in your future. You’re going to incur a capital gains tax on the profit of $1,700 of at least $375, so subtracting that from $5,200 leaves you $4,826. If you’re trying to increase your holdings, in order to add to your stack, bitcoin has to move lower than $4,826. So, let’s say it does go to $4,700 which is initial support level, or even the $4,500 main support level – you’ll net a gain of either $126 or $326, and can add a whopping 0.072 to increase your stack and go from 1.0 to 1.072 bitcoin.
However, if bitcoin goes to $6,000 – you’re out of the game with no bitcoin (assuming that was all you had). The crypto news goes bull-crazy so you quickly buy-in and reduce your stack to 0.80 including that tax liability. You’ve effectively risked 0.20 bitcoin to make 0.08 bitcoin and eroded your stack in the process – so not a good move. The better strategy is to either believe Bitcoin is going up or down in the long term and position that way to build an inventory by position trading. If you own 1 bitcoin and have $5K available to trade with, swing or position trade so the capital gains go into buying more bitcoin. Making trades investments, and investment trades result in mixing strategies that will cost you in the long term.
Let’s face it, timing the market is hard. If you have zero skills or time to invest in charting, the chances of timing the perfect buy/sell opportunities will depend solely on luck. You’ll hear those selling their bitcoins now brag on how much they made while waiting for the dip to buy back. But what if the dip doesn’t come? The same thing happened in the Gold market when, for nearly five years, it traded between $260 and $330. Near the end of the fourth year, Gold started to rally and when it hit $400 everyone was selling with the idea of buying back the dip at $300. The dip never came because Gold didn’t pull back, it kept rising and never turned back to those levels during a 10-year rally.
Of course, that doesn’t mean Bitcoin won’t pull back, but Gold is a good example of what can happen with your long term investment if you try to time a run and miss. The loss from having to buy back in higher can quickly erode your portfolio and force you to sell your holdings at the wrong time to pay the taxes incurred. This example doesn’t compare Gold from a fundamental perspective, but rather a technical one and only to illustrate a point.
Bitcoin as Payment
For some people, buying large amounts of Bitcoin is not a financially-feasible investment strategy. One method of acquisition is to accept payment for goods or especially services in bitcoin.
Another is to earn bitcoins through affiliate marketing plans. For example, Coinbase will pay you $10 for every customer who signs up using your custom link and deposits at least $100. Binance offers up to 40% of transaction fees for referrals you make and this can add up fast as adoption increases for those with large audiences. A company called Lolli offers services similar to eBates, where customers earn cash-back for purchases from thousands of websites.
If you’re a freelancer, editor, musician, social media manager, artist – or any other business where your services are exchanged for payment, accepting Bitcoin can be helpful in a number of ways.
- Help you SAVE money: those who get paid in Bitcoin, who are also bitcoiners trying to build investment stacks, find it easier to save money they would otherwise probably spend. It is psychologically and physically harder to spend your bitcoin than it is to spend cash!
- Help you EARN bitcoin profit: if you accept bitcoins for payment and you need those funds for paying the bills, cash it out to fiat immediately. But if you don’t need those funds right away, holding it often results in a net profit far greater than any other savings option. A good strategy might be to accept bitcoin as payment, if the price increases, cash out only the amount earned and let the rest ride as a long-term investment.
- Help you BUILD an investment: Those who earn Bitcoin as wages need to understand the tax implications and best practices for cashing out bitcoin to fiat currency. It works like this: say you earn $5,000 and accept bitcoin as payment. The best way to receive payment is to a hardware wallet – not an exchange wallet. Why? because the moment your bitcoin hits the exchange, it creates a taxable transaction and sets a base for calculation. For example, say you earn $5,000 and receive it in a hardware wallet (like Ledger), then the price goes up to $6,200. When you need that $5,000 earned – you send only that much bitcoin to an exchange and cash it for fiat right away. You pay taxes on the $5K income just as if received as cash, but there is no capital gain incurred. The overage of $1,200 worth of bitcoin remains in your hardware wallet. It is not considered a capital asset by the IRS until it is exchanged. Then should the price of bitcoin go to $10K – your investment value increases. Of course, if the price goes down, your investment would decrease – so strategy depends upon your individual goals and plan.
Make a Bitcoin Profit Plan
Determine your investment plan and stick to it. Don’t be the guy waiting for the market to pull back and buy the dip because you sold and took a little bitcoin profit. If you believe Bitcoin will be higher in 2 to 5 years, then keep your trading funds separate from your inventory and don’t risk your stack. Use fiat to buy the dips and add to that stack vs. selling portions of it in hopes there are dips which will turn a profit or increase inventory. Have a plan that works regardless of the daily price of Bitcoin to act on the opportunity vs. react on the market.