Hold or flip? How to determine the best approach for you to invest in cryptocurrencies

In the fast-moving world of cryptocurrencies, investors are faced with an age-old question with a modern twist: Should you hold or flip? The correct answer depends less on market timing and more on your personal goals, emotional tolerance, and time commitment.

While holding cryptocurrencies for the long term can provide potential growth and favorable tax treatment, active traders may seek to make quick profits by responding to short-term price fluctuations. This guide explains the pros, cons and practical considerations for each approach, helping you decide which path best matches your investment personality.

What does “HODL” mean?

The term “HODL” — originally a misspelling of “hold” — is now an acronym that stands for “hold on for dear life.” For cryptocurrency believers, this philosophy reflects long-term ownership. Holding involves buying and holding digital assets through market fluctuations, with the hope that innovation and adoption will drive future value.

“Long-holding is investing in an asset class that you believe will perform well over the long term, longer than five years,” explained Lawrence Sprong, CFP, a wealth advisor and founder of Mitlin Financial. “You will be looking to hold the position for as long as possible, perhaps adding to it as it increases in value, or if it declines, you can add additional money toward the investment to lower the average cost.”

Long-term investing can help smooth out market volatility and allow time for potential compounding returns to work to the investor’s advantage. Holding may also reduce the emotional stress of responding to short-term market movements that can lead to costly mistakes.

What does “face” mean?

“Flipping” – or active trading – means buying and selling to profit from short-term price changes. But quick profits come with increased risks and requirements for constant attention.

“Flipping and active trading are like gambling,” Sprong said. “You take a position… and look for short-term gains. Once that is achieved, you will look to sell. If the value of the investment declines in the short-term, you may look to sell the investment and limit the downside risk.”

Trading can be exciting, but it also requires discipline, technical knowledge and time. Cryptocurrency market volatility can expose active traders to huge losses.

Pros and cons of holding versus flipping

Each approach presents trade-offs in effort, emotion, and potential reward.

• a contract: Less pressure and number of active trades, but requires a longer time horizon as well as patience and conviction during market downturns.
• Flipping: Potential for faster gains, but may result in higher taxes and emotional volatility during market downturns.

Max Avery, business director and director of Digital Ascension Group, which specializes in digital assets for high-net-worth individuals and families, explains one simple reason why long-term holdings are more beneficial: “Long-term holdings can benefit from long-term capital gains [tax] Rather than short-term capital gains [tax]…. ”

For tax purposes, the IRS classifies cryptocurrencies and digital assets as property, not currency. This means that any income made from selling cryptocurrencies is subject to tax. However, the amount of time you hold a crypto asset before selling will determine how much tax you will owe on the sale, if you make a net profit.

According to Coinbase Learn, cryptocurrencies held for more than a year generally qualify for long-term capital gains rates at the federal and state level (if applicable) — typically 0%, 15%, or 20% depending on your income bracket. These lower rates can provide meaningful tax advantages for patient investors, but it’s worth noting that high-income investors may also owe an additional 3.8% net investment income tax on their gains.

By contrast, cryptocurrencies sold in less than a year are taxed as short-term capital gains, meaning they are treated like ordinary income, which is often taxed at a higher rate. In other words, the time you spend in the market can directly impact not only your potential returns, but also your tax bill.

How do you know which strategy suits you?

Before you decide, ask yourself:

• What is my risk tolerance?
• Do I check cryptocurrency prices multiple times a day?
• Can I afford to see my portfolio drop 30% overnight without panic selling?
• How much time can I realistically devote to tracking the markets?
• Can I afford to pay short-term capital gains tax rates?

Your answers can reveal whether you are better suited to a buy-and-hold strategy or the active, fast-paced nature of trading. It’s important to emphasize aligning investment choices with your emotional comfort level and time horizon, two factors that can determine your long-term financial success.

Combined approaches

For many investors, the best strategy may lie somewhere in between. The hybrid method involves keeping a core position for long-term growth while allocating a smaller portion to short-term trades.

“Those who are torn between holding and trading need to ask themselves whether they have what it takes to trade this type of investment,” Sprung explained. “If the answer is yes and they want the best of both worlds, they can buy a position in cryptocurrencies to hold for the long term while getting another position that they will use for trading. [in the short term]”.

Taking a balanced approach based on your goals, risk tolerance and mood can help balance potential upside from active trading with long-term compounding stability.

Managing expectations and risks

Whether you’re holding or flipping, diversification is still essential. Fidelity Investments emphasizes spreading investments across stocks, bonds and other investments to avoid overexposure and mitigate risk.

Including other types of investments in your portfolio, such as cryptocurrencies and digital assets, can be a key diversification strategy. Maintaining discipline, setting clear exit points and holding a portion of your portfolio in cash or stablecoins can also help mitigate volatility.

Bottom line

There is no one-size-fits-all answer when it comes to cryptocurrency investing. Grabbing and flipping comes with unique rewards and challenges. The best approach depends on your goals, mood, and time horizon. Whether you’re building long-term wealth or chasing short-term opportunities, success comes as much from understanding yourself as it does from understanding the market.