What’s "taking profits" in crypto?
In financial markets, "taking profits" means selling assets for more than what you originally paid for them. These "profits" are measured in terms of fiat currencies like USD.
If you sell your assets when they're trading above your initial investment, you're taking profits. You can take profits in any tradable asset, including bonds, stocks, and precious metals. "Taking profits in crypto" simply means selling digital coins and tokens for a gain. Many crypto traders measure this gain against fiat currencies. Calculating their cost allows you to determine whether you’ll profit by selling their holdings. "Cost basis" refers to the average dollar price an investor paid for a given asset. To determine a cost basis, users need to add all the times they spent on their cryptocurrency at different prices and divide it by their total holdings.
For instance, if you bought one bitcoin (BTC) for $20,000, your cost basis would be $20,000. But, if you bought another BTC when it was trading for $10,000, the cost basis would reduce to $15,000 ($20,000 + $10,000/2 = $15,000). Bitcoin needs to trade above an investor's cost basis before they can sell for a profit.
Calculating cost basis gets increasingly complicated the more often an investor buys and sells cryptocurrencies. However, many centralized crypto exchanges (CEXs) automatically calculate a user's average token price each time they make a trade. There are also software-based crypto portfolio trackers that can monitor a user's trading activity and automatically adjust their cost basis.
Is taking profits the same as "hodling" crypto?
New crypto investors sometimes confuse the "hodl" strategy with taking crypto profits. While these strategies can be related, they don't mean the same thing.
"Hodl" is a long-term "buy and hold" crypto investment strategy. This intentionally misspelled term gained prominence in the early 2010s on online forums like Bitcointalk. "Hodlers" believe investing in crypto assets for years or decades is superior to short-term trading.
People who "hodl" crypto aren't actively taking profits. It's only when a long-term investor sells their tokens for a profit that they realize fiat gains.
Why do investors take crypto profits?
There are countless reasons an investor would decide to sell their crypto for a profit. A few common explanations for "cashing out" on crypto include:
- Lock in gains: The primary reason someone sells crypto above their cost basis is to guarantee gains. Whether investors have been holding their crypto for days or decades, the only way to ensure they profit is to convert coins for cash.
- Reinvest in another digital asset: Some investors may feel the cryptocurrency they own has maxed out its near-term gains. Here, they can consider how to take profits in crypto and reinvest in a competing token. The assumption is that the new token will grow faster than their initial investment.
- Fear of an upcoming bear market: Crypto investors may sell their tokens if they anticipate a correction or a sustained bear market. Traders may fear a recent crypto bull run is nearing its end or that their token is in an unsustainable bubble.
- Trading seasonality: Interestingly, many investors believe the time of year significantly impacts market demand. People who subscribe to "seasonality" in the crypto market may exit their positions before a traditionally bearish time of year.
When to sell crypto profits?
There's no "optimal" time to sell crypto for profits. Every investor's situation is unique, so determining the best time to sell crypto depends on their financial goals.
Although choosing when to sell crypto is highly individual, it doesn't mean investors can't plan their profit-taking schedule. Indeed, the most experienced crypto investors share a few strategies to determine when to sell their cryptocurrencies:
Clearly define your crypto investment goals
Before buying a cryptocurrency, develop a clear crypto investment strategy. To get started, consider the following questions:
- What’s your motivation for buying a specific digital asset?
- How long do you intend to hold your crypto?
- Are you interested in making a short-term gain, or will you hold this token for years?
How you answer these questions will affect when to take crypto profits. For instance, if you believe in the long-term future of Bitcoin, you may buy small increments of BTC over the long term and avoid monitoring daily price action. However, if you’re on the short-term crypto trader team, you may need to set limit orders to ensure you make a profit if your trade works out.
A clear game plan can help you stick to your crypto goals during times of high volatility.
Set target crypto price levels
As you develop your crypto investment strategy, consider how much you'd like to make from your tokens. Determine what price levels your cryptocurrency has to hit to achieve your financial goals.
For instance, if you have a cost basis of $2,000 in one Ethereum (ETH) and want to make $5,000, you'd need ether to hit $7,000 ($7,000 - $2,000 = $5,000). In this case, you could set a stop limit order at $7,000 to automatically sell at your target price.
When calculating these prices, remember that there are trading fees associated with buying and selling cryptocurrencies. Most countries also charge capital gains taxes on realized crypto profits.
Monitor crypto-related news
News stories related to crypto, Web3, and NFTs (non-fungible tokens) can drive the prices of digital assets. Investors should pay attention to reputable crypto news sites to stay informed on developments in this industry. Sometimes, a significant event can change your crypto investment thesis.
Be sure to follow crypto news websites with a long industry track record. A few prominent crypto news publications include CoinTelegraph and CoinDesk (at the time of writing).
Review technical chart patterns and historical trends
Crypto doesn't have as much historical data as the stock market, but you can glean some insights from technical chart patterns and past price action. Set aside some time to see how your cryptocurrency responds to major trend lines like the 50-day and 200-day moving averages. You can also look at the long-term performance of your cryptocurrency to see if you notice any patterns.
While technical analysis is the most useful for short-term traders, this data may influence when long-term investors choose to sell their crypto for a profit.
How to take crypto profits
When an investor decides to sell crypto for a profit, they usually submit a sell order on their preferred CEX. Large CEXs like Binance and Coinbase have high trading volume and liquidity, making it easy to instantly find a buyer willing to pay for your token.
While you can manually post a sell order for your crypto, there are other ways to sell tokens for a profit. For instance, investors who have crypto in a non-custodial wallet can link it with a compatible decentralized crypto exchange (DEX). While you can't swap crypto into fiat currencies on a DEX, you can trade your crypto for other tokens or stablecoins.
Also, some crypto investors program a "take profit" limit order on their CEX. These orders automatically sell your crypto in a CEX if it hits a predetermined price.
Are there ways to profit from crypto without selling?
Buying crypto low and selling high is the simplest way to make a profit. But here are other ways you can generate crypto returns without selling your digital tokens:
- Crypto lending services: Centralized or decentralized crypto lending platforms allow depositors to earn a yield on their crypto. However, investors need to feel comfortable entrusting their crypto to a company like Nexo or a smart contract protocol like Aave.
- Crypto staking: Proof-of-Stake (PoS) blockchains like Solana and Polkadot allow token holders to lock the native cryptocurrency on-chain to secure the network. To incentivize more people to join these networks, PoS blockchains offer token rewards.
- Dividend-paying cryptocurrencies: A few digital currencies pay regular bonuses, similar to dividend-paying stocks. For example, the exchange KuCoin's KCS token regularly redistributes the company's profits to token holders.
Choosing when to take crypto profits is always a personal decision. While there are strategies everyone can use to time their sell orders, you should always ask yourself whether this decision makes sense for their financial goals.
Although crypto investing can sometimes be complex for new investors, at Worldcoin, we aim to make this simple. We intend to put a share of our crypto in the hands of every individual for free while maintaining their privacy and anonymity. We’re also airdropping free DAI to anyone who downloads our app. Subscribe to our blog to learn more about the cryptocurrency market.