Cryptocurrency investing can be a wild ride. For the best chance of success, it's important to think not just about buying but also when to sell crypto. Despite the popular advice to "hodl" (hold on for dear life), there are situations when selling is the best option.
When investing in stocks, a good rule is to buy and hold for at least five years. Crypto is an entirely different and much more volatile market, so the traditional rules don't always apply. Keep reading to learn how to know when to sell crypto and the factors to consider in this decision.
When you shouldn't sell crypto
Selling crypto shouldn't be an emotional decision. While this is true with any type of investment, it's especially important to remember with cryptocurrencies, since they can go through such massive ups and downs.
One of the most common mistakes that crypto investors make is panic selling when prices drop. It's often a decision they regret later. They buy when a cryptocurrency is at a high, sell when the price plummets, and then miss out if it bounces back.
Before you make any rash decisions, consider why the price has dropped. Is it a serious issue with that crypto or just the whims of the market? It's certainly fine to sell if you no longer believe the cryptocurrency is a good investment. But if you still think it has long-term value, hang on to it.
Things to consider before selling crypto
Here are the most important things to consider before selling crypto:
How much will you sell? You don't need to sell everything, especially if the crypto has increased in value. You can sell a portion of your holdings to rebalance your portfolio and hang on to the rest if you still think the cryptocurrency will be a winner.
What are the tax implications? If the cryptocurrency has increased in value, you'll owe crypto taxes. It's taxed as long-term gains if you hold the crypto for more than 365 days.
Long-term capital gains have lower tax rates than short-term gains, which are taxed as ordinary income. If you're close to the year mark, consider waiting to sell your crypto until after it passes that long-term gains threshold.
Things to consider before buying crypto
Here are the most important things to consider before buying crypto:
What makes this cryptocurrency a good investment? It's easy to get swept away by the hype surrounding a popular cryptocurrency. Whenever you invest in a cryptocurrency, make sure you've researched it thoroughly and that you believe it's a sound long-term investment.
How much will you invest? Putting your entire life savings in crypto is a bad move. To avoid taking on too much risk, stick to the guideline of 5% to 10% of your portfolio in crypto at most. Start by figuring out how much you'll put into it as a whole, and then decide how much money you'll allocate to specific cryptocurrencies.
What are your long-term plans with your crypto portfolio? You may decide to hold anything you buy for at least five years to see what happens. Another popular strategy is setting price targets for when you sell. For example, you could sell 20% of your holdings if the price reaches a certain target, 40% at another price target, and so on.
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