Not holding on to your crypto could be a decision you regret.
Crypto is on the rise, with a study by The Ascent finding that over 50 million Americans are likely to buy crypto in the next year. Right now, most buyers purchase crypto as an investment. Nearly 67% of those who own or have owned crypto said that was a reason they bought it.
Unfortunately, a large portion of buyers also make a serious mistake with their crypto -- they sell it too quickly. About 65% sell within a year of buying crypto, and over half sell it within six months.
In select cases, it can make sense to unload crypto in less than a year. However, you're usually better off when you buy crypto as a long-term investment. Here's why.
It gives your crypto time to grow
Even though most buyers look at crypto as an investment, many aren't using the best investing strategy. The approach that has stood the test of time is investing for the long haul. Buy cryptocurrencies that you believe will increase in value, and hold on to them for at least three to five years.
To date, this has been the method that has produced the biggest gains with cryptocurrency. Here are examples of gains the top coins have made over the last five years:
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- Market-leader Bitcoin turned $10,000 into $670,000.
- The second-largest cryptocurrency, Ethereum, turned $10,000 into $1.85 million.
If you had bought either of those five years ago and sold within the year, you could have made money. But you wouldn't have made nearly as much as you would have by holding on for longer.
There's no guarantee that you'll profit by keeping crypto for years. It's a high-risk investment, and it's very volatile. Long-term investing simply gives you the best chance of success. Short-term investing is much more difficult, because success depends on getting in at the right time, and it's impossible to predict price movements.
If you don't plan to stick with your investment for the long haul, you may be pressured to sell at the first big price drop. Or, if the price increases, you could feel tempted to take your profits and potentially miss out on future gains.
You pay less in taxes and fees
There are a couple of extra costs when selling crypto within a year. The big one is short-term capital gains tax.
Whenever you make a profit selling or exchanging a cryptocurrency, the amount you earn is capital gains. The IRS requires that you report capital gains and pay taxes on them. You pay either short-term or long-term capital gains tax, depending on whether you held the crypto for more than one year. Short-term capital gains are taxed as part of your income. Long-term capital gains have lower tax rates.
If you keep your crypto for longer than a year, then you pay less in taxes when you sell it, because it will be considered a long-term capital gain. You also don't need to pay any taxes on it until you sell. Those 65% of consumers who sell crypto within a year end up paying more in taxes.
In addition, you need to pay transaction fees when you sell crypto. These aren't too expensive with the best cryptocurrency apps and exchanges, but they're still a cost you pay for selling. By limiting how often you sell crypto, you pay less fees.
Selling crypto within a year isn't always a bad decision. For example, if something changes and you no longer think a crypto is a good bet, then selling it could be the right decision.
Outside of those rare exceptions, the most effective strategy for investors is to play the long game, and that applies with both stocks and crypto. Let's assume you buy a crypto because you believe in its value. If you're right, you'll likely make more money by holding on to it compared to selling it too soon. And you'll save on taxes and fees, which also helps you maximize your profits.
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