In just the last month, Bitcoin (BTC -1.87%) has increased more than 50% and notched a new all-time high of nearly $73,000 on Monday. Zooming out even further, the world's premier cryptocurrency has increased by more than 225% in the last year.
No matter the type of asset, when its value increases in such a short period, it can create concern that it might be time to sell. However, before deciding to part ways with your precious Bitcoin, ask yourself a few questions.
Image source: Getty Images.
Make sure you have a plan
The first one might be the most important one: Have you reached your investing goals?
Every person's financial and investing situation is different. If you've been buying Bitcoin since the bottom of the bear market and are in a financial squeeze, it could be worth taking some profits. This way, you'll reward yourself for the conviction you had when everyone else was scared to own Bitcoin during the crypto winter.
Perhaps your goals are more lofty, and you don't have any pressing financial matters. In that case, it might be best to remain patient.
What I'm getting at is that it's vital, imperative, and of the utmost importance to have a game plan in place. If you look back at past bull markets, you'd see that Bitcoin can fall as quickly as it rises.
One day, Bitcoin will hit a peak for this cycle, and it would be a shame to see your portfolio grow, reach some of your financial goals, and then miss an opportunity to lock in gains because you don't have an exit strategy. Do yourself a favor and come up with a plan.
Bitcoin looks like it has room to run
Now for a less personal question: Are you willing to sell before a bull market peak?
This isn't an invitation to try to time the market; whenever you do so, you'll inevitably fail. Again, this is just another reason to have an exit strategy in place. But I digress.
Analysis of on-chain metrics and historical patterns imply that Bitcoin is in a position usually associated with the early phases of sector-wide bull markets. One of the most straightforward statistics to quantify this is the market-value-to-realized-value ratio, or MVRV.
Market value is calculated by multiplying Bitcoin's circulating supply by its current price. (It's the same as the market capitalization.) On the other hand, realized value measures the price of each Bitcoin the last time it was transacted. This can provide a more granular insight into market dynamics as it removes the generalization that every bitcoin in circulation was purchased at the most recent price.
By dividing the two, you'll get the MVRV and a much better glimpse into Bitcoin's current position. MVRV has historically proven to be a timely indicator of when a cycle peak is near. With its current value at just 2.65, Bitcoin has some room to run before it reaches the level of around 3.5, when bull markets begin to lose steam. Simply put, Bitcoin might only be warming up for what's to come.
Image source and data by Trading View.
What it means to own Bitcoin
The last question is arguably the most important: Are you willing to sell what might go down in history as the scarcest, most durable asset ever?
In many ways, Bitcoin is not just a superior cryptocurrency but arguably a near-perfect form of money. It is easily divisible, censorship-resistant, deflationary, decentralized, and most importantly, strictly finite. There will never be more than 21 million Bitcoins on the market.
For these reasons and some others, several theories created by people much smarter than me suggest there's a provable probability of Bitcoin reaching $1 million one day. If you want to learn more, I recommend brushing up on former physics professor Giovanni Santostasi's application of the Power Law to Bitcoin.
The possibility of a $1 million Bitcoin -- let alone other price targets far higher than today -- may come off as sensational. However, before ruling them out, consider how far it has come.
Imagine telling someone that in 15 years, Bitcoin would rise from being worth a few pennies per digital coin to one day being the eighth-most valuable asset on the planet. Now imagine what might be possible in another 15 years.
We must genuinely appreciate Bitcoin's scarcity and use it as the primary consideration when determining whether or not it's time to sell. Maybe the most crucial question we should ask ourselves is: What would your future self tell you to do?
