Should I sell my Bitcoin now that the price has doubled in just one year?
A lot of Bitcoin owners no doubt have been asking themselves that question of late, given the rapid rise in the Bitcoin price since early December.
In the past four weeks the price of Bitcoin rocketed 48%, from $775 to $1,150, until pulling back yesterday (Thursday) into the $950 range. Today (Friday) the digital currency has slipped further to about $900. But the Bitcoin price is still 16% higher than it was Dec. 1, and more than double the price on Jan. 1, 2016.
Returns like that typically have investors thinking it may be time for some profit-taking. After all, how often does an investment double in one year?
Those who bought at much lower prices - the digital currency traded below $300 through most of 2015 and below $500 through the first five months of 2016 - may also be tempted to sell their Bitcoin now.
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It's hard to argue with profits of between 100% and 200%.
And anyone remotely familiar with Bitcoin remembers what happened the last time Bitcoin traded over $1,000, in the fall of 2013. The Bitcoin bubble burst, causing huge losses for those that bought at the top as the price skidded to below $200 over the next year.
Fears that will happen again make a compelling case that it's time to sell Bitcoin.
But another major collapse isn't likely...
Don't Sell Bitcoin Out of Bubble Fears
Much has changed in the past three years. The 2013 episode was brought about by a combination of media hype, wild speculation, a lack of oversight, and thinly traded markets.
For one thing, most Bitcoin trading back then was done on the troubled Mt. Gox exchange, which imploded in early 2014. Today's Bitcoin exchanges are much better run. The Winklevoss twins' Gemini exchange, for example, is fully compliant with government regulations.
On the Chinese Bitcoin exchanges, where most Bitcoin is traded, the volume is 37 times higher now than it was then, creating a more stable market better able to determine prices.
Finally, Bitcoin has become more mainstream. In 2013 the digital currency was still dominated by technophiles, libertarians, and those who used the anonymous transactions in criminal pursuits. Since then a much larger and more diverse array of users have joined the Bitcoin community, including venture capitalists, the big banks, and rank-and-file citizens from around the world.
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In addition, it's worth noting that since bottoming in early 2015, the Bitcoin price trend has moved higher. Although there have been pullbacks after other spikes, each time the price of Bitcoin has consolidated at a significantly higher level.
For example, in late May-early June, the Bitcoin price jumped from $450 to more than $750. In the weeks that followed, the price of Bitcoin remained volatile but never fell below $550. Eventually it consolidated around $600.
The current sharp pullback is most likely the beginning of a similar process, with the Bitcoin price consolidating at a significantly higher level than where this rally started.
Still, the impulse to sell Bitcoin is strong when you've doubled or tripled your money.
Here's why investors should consider hanging onto Bitcoin despite their big gains...
Why Selling Bitcoin Now Could Be a Mistake
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The real question here is whether the capital you have invested in Bitcoin could be put to better use elsewhere.
Unless you believe you can make another double or triple (or better) elsewhere, the answer is no.
Yes, Bitcoin has that much potential. And if you sell your Bitcoin now, you'll surrender those big gains of tomorrow for today's profits.
As Bitcoin adoption increases, particularly within the financial industry, demand for Bitcoins will grow. But to be useful on a large scale, the value of Bitcoin will need to vastly increase as well.
Attempts to quantify this value estimate what the market cap of Bitcoin (the total number of Bitcoins times the price) would need to be as it becomes more widely adopted.
Two Wall Street analysts have crunched these numbers and come up with some eye-popping numbers.
Needham & Co. analyst Spencer Bogart has calculated Bitcoin will need a market cap of $40.3 billion by 2020 to fulfill growing demand. That sets a 2020 Bitcoin price target of $2,231 - more than double where it is now.
In November 2015, Gil Luria of Wedbush Securities issued a report on Bitcoin in which he projected the price out to 2025. He projected that the Bitcoin market cap then would need to be $237 billion, and the Bitcoin price $17,473 - about 18 times the current level.
Bitcoin investors that want to play it safe, however, can try a battle-tested Money Morning strategy.
"If you have a 100% gain, sell half," said Money Morning Director of Technology & Venture Capital Research Michael A. Robinson. "That way you get back your entire investment and are 'playing with house money.' This strategy keeps you in the market capturing fresh gains with no further risk to your original capital."
Up Next: Why the Bitcoin Price Suddenly Took Off
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.