With the rise of cryptocurrencies like Bitcoin, Ethereum, and others, many investors are wondering how long they should hold onto their crypto investments. There is no definitive answer, as the ideal crypto holding period depends on your goals, risk tolerance, and market conditions. However, there are some general guidelines that may help you decide on an appropriate timeframe for holding cryptocurrency.
What are your investment goals?
The first thing to consider is why you invested in crypto in the first place and what you hope to gain from the investment. Are you looking to make a quick profit by trading crypto over short time horizons? Or are you a long-term investor who believes in the technology and wants to hold for years? Your goals will impact how long you should hold.
Here are some common crypto investment goals:
- Short-term trading – Some investors get into crypto to make quick gains by trading on volatility and price swings over days or weeks. These traders typically sell as soon as they’ve realized a target profit.
- Medium-term investing – If you want to ride broader market trends and momentum, you may look to hold crypto for medium-term periods like months or years. You would sell when you believe a peak or downturn is imminent.
- Long-term investing – Long-term “hodlers” are in crypto for the long haul, such as 5-10+ years. They have faith in the long-term vision and use cases of cryptocurrencies and intend to hold until they can realize large gains.
Knowing your motivations can help determine if you should be holding crypto short term or long term.
How much risk can you tolerate?
Cryptocurrencies are highly volatile assets with high risk and high potential reward. You need to gauge your personal appetite for risk when deciding on crypto holding periods.
Shorter holding periods tend to involve more risk. With frequent trading, you face risks like market volatility, timing the market incorrectly, or speculative bubbles bursting suddenly. Longer holding periods tend to involve less regular trading and lower risk of mistimed trades. However, longer holds require stomaching interim volatility and corrections.
Consider your personality and past experiences with other volatile assets. If you have a low risk tolerance, longer holding periods may be more suitable for you.
What are the tax implications?
Crypto taxes can also impact ideal holding periods. In many jurisdictions, crypto is treated as property for tax purposes. This means:
- You pay capital gains taxes when selling crypto at a profit
- Short-term capital gains for assets held under 1 year are taxed at your ordinary income tax rate
- Long-term capital gains for assets held over 1 year are often taxed at more favorable rates
Because of the difference in short-term vs long-term capital gains rates, tax-focused investors often choose to hold crypto for over a year before selling. This allows them to qualify for the preferable tax treatment.
However, taxes alone shouldn’t dictate when you sell crypto. You need to consider your whole financial picture.
How is the broader crypto market performing?
Broad market conditions also impact if it’s prudent to hold crypto or take profits. When deciding holding periods, consider:
- Is the market in a bull or bear phase? Bull markets may merit longer holds to ride gains, while bear trends may warrant selling to avoid further losses.
- Is the market overheated and due for a correction based on volatility or other indicators?
- Are there major technological or regulatory changes upcoming that could impact prices?
Staying on top of market news and sentiment helps inform decisions on crypto holding periods. You may choose to take profits or cut losses early if the market looks poised to turn.
How liquid do you need the investment to be?
An often overlooked factor is liquidity – how easily you can convert your crypto holdings back into cash when desired. Cryptocurrencies are generally considered less liquid than traditional assets.
If you need your crypto investment to be liquid for spending or to fund other purchases, you may lean towards shorter holding periods. You don’t want to be stuck holding illiquid assets when you need cash.
On the other hand, if you don’t need immediate liquidity and want maximize gains, longer holding periods make more sense.
Historical performance as a guide
While past performance doesn’t guarantee future results, looking at historical crypto holding periods can provide rough guidance:
| Holding Period | Potential Returns* | Historical Results |
|---|---|---|
| 1 week | Very high volatility. Potential for large gains or losses. Risky for most investors. | Bitcoin has seen weekly swings between -28% and +42% in past year. |
| 1 month | Still very volatile. Opportunity to ride short-term momentum. | Ethereum has gained +18% in some months, and lost -24% in others. |
| 6 months | More moderate volatility with higher potential gains. | Crypto indexes have posted +10% to over +40% 6-month returns in recent years. |
| 1+ years | Lower volatility but ability to capture long-term trends. | Bitcoin has posted returns from +120% to +5,500% across multi-year periods. |
| 3+ years | Potential for large gains depending on entry timing. | Ethereum gained +25,000%+ from mid-2017 to late-2020. |
* Past performance does not guarantee future results
This table demonstrates how extending holding periods can significantly dampen volatility while increasing total return potential. Ultra short-term holdings under a few weeks exhibit extreme volatility with the highest risk. Longer timeframes of several months to years smooth out some volatility while allowing for higher possible gains.
3+ year holdings have yielded extraordinary returns in past bull market cycles. However very long holds also come with opportunity risk if you miss chances to realize gains along the way.
Dollar cost averaging to optimize buying timeframes
Dollar cost averaging (DCA) is a common strategy used to optimize timeframes for purchasing crypto. With DCA, you spread out buys over a longer period instead of investing a lump sum all at once. This helps reduce risk from volatility and mistiming purchases.
For example, you could DCA $500 monthly over 10 months. This would give you an average cost basis over time rather than being overly exposed to a single price point.
DCA takes the emotion out of trying to “time the market” and provides a framework for longer term holding periods.
Conclusion
There are compelling arguments for both short and long-term crypto holding periods depending on your situation and objectives. Traders may opt for short-term holdings to capitalize on swings, while long-term investors are focused on generating and compounding substantial returns over 5-10+ years. Some key factors to consider are your risk tolerance, liquidity needs, market conditions, and taxes.
It’s not necessarily an all or nothing choice. You may look to take some profits on a portion of holdings to realize short-term gains, while continuing to hold a core crypto position for long-term appreciation.
Like any investment, crypto requires ongoing evaluation of both external market factors and your internal needs to determine the ideal holding timeframe. An approach combining dollar cost averaging, profit taking, and long-term holdings tends to maximize results for most goals and risk profiles.